Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica

Minimum wages in Costa Rica clearly do not act as a wage floor for all workers.¹⁶ Nevertheless,
Figure 2 does present evidence that minimum wages affect the wages of some workers in Costa
Rica as there are spikes in the distribution of wages at many of the same locations as the spikes
in the distribution of minimum wages. In 1988 and 1993, there are two clear spikes in the
distribution of wages that correspond to the minimum wages that apply to the largest proportion
of workers: one at the level of minimum wages for unskilled workers and another at the level of
minimum wages for unskilled/semi-skilled workers. The distribution of hourly wages for 1999
also exhibits two spikes near these two sets of minimum wages, although the matching is not as
clear as for the other two years. Further, in all three years there is a spike in the upper end of the
distribution that corresponds to the legal minimum wage for licenciados.

Figure 3 presents overlays of the distribution of minimum wages onto the distribution of
actual hourly wages in 1993 for the urban formal sector and the five informal sectors defined
previously. (Similar graphs for 1988 and 1999 are presented in appendix Figures A2 and A3).
To facilitate the comparison between sectors, we use the same x and y scales to draw the kernel
density functions for each sector. The urban formal sector has the smallest proportion of workers
earning below the minimum wage, while the urban informal small firm and rural informal small
enterprise sectors have the largest proportion of workers earning below the minimum wage.
Nevertheless, an examination of the graphs presented in figure 3 also provides evidence that
minimum wages do affect the wages of a paid employees in all covered sectors, but do not affect
the wages of self-employed workers (the uncovered sector). Again, if legal minimum wages
affect the actual wages of workers, then spikes in the distribution of minimum wages should be
reflected with similarly located spikes in the distribution of wages. This appears to be the case in
all sectors where workers are legally covered by minimum wages: the urban formal, rural formal,
urban informal small firm, and rural informal small enterprise sectors. Indeed, the spikes are

¹⁶ This results is consistent with a previous study examining enforcement of minimum wages in Costa Rica,
Gindling and Terrell (1995) use 1976-1991 data to compare the proportions of workers earning below the legal
minimum wage in the covered and uncovered sectors. They find that over one-third of workers in Costa Rica earned
less than the lowest minimum wage for the industry of their job in both the sector covered by minimum wage
legislation and the uncovered sector. Workers earning less than the minimum disproportionately are female, very
young (less than 19 years old), very old (more than 60 years old), less educated, living in rural areas, and working in
agriculture or personal services. Gindling and Terrell (1995) speculate from the finding that the proportion of
workers earning less than the minimum wage was the same in both the covered and uncovered sectors that minimum
wages were not an important determinant of wages in the covered sector in Costa Rica. However, in our current
paper, which uses econometric techniques on more recent and more detailed data that matches legal minimum wages
to workers, we find that although minimum wages do not affect a large group at the bottom of the wage distribution,
they do affect wages of approximately two-thirds of the workers who earn at or above the minimum wage for their
occupation category.

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