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

more marked among workers in small firms than in the large firm sectors. It is interesting to
note that in both the rural and urban small firm sectors there is even a spike at the minimum
wage for domestic servants. On the other hand, Figure 3 also provides evidence that minimum
wages do not affect the wages of self-employed workers (the uncovered sector) since there are
no noticeable spikes in the distribution of self-employed earnings around the minimum wages.
Thus, unlike Fajnzylber (2001), we find no evidence of a "lighthouse effect" on the wages of
uncovered self-employed workers.

Wage regression results

The coefficients on the minimum wage from the estimation of equation (1) for each
sector are reported in Table 3.¹⁷ They provide strong evidence that increases in the minimum
wage cause an increase in the wages of workers in the urban formal and both the rural large and
small firm sectors. The coefficient on the minimum wage variable is significant at the 1% level
in the equations for each of these sectors. Among these sectors, the impact of minimum wages
on average wages is lowest in the urban formal sector (0.103). The impact of minimum wages
on average wages is largest in the rural informal small enterprise sector (an elasticity of average
wages to minimum wages of 0.396), followed by the rural large enterprise sector (0.164). This is
what we would expect if minimum wages are enforced similarly in all three sectors because there
are more workers with wages near the minimum wage in the low-wage rural sectors. There is
weak evidence that minimum wages affect the wages of workers in the urban informal small firm
sector. The coefficient on the minimum wage variable in the urban informal small firm sector
(0.149) is not significantly different from zero at the 10% level, but is significant at 12%. We
find no evidence that legal minimum wages affect the wages of workers in the two self-
employed (uncovered) sectors. The coefficient on the minimum wage variable in the two
equations for self-employed workers is not significantly different from zero for any reasonable
level of significance.

VI. Conclusions

The evidence presented in this paper suggests that, although legal minimum wages do not
act as a wage floor for all workers in Costa Rica, legal minimum wages are enforced for many of
the workers who are covered by the legislation, paid employees. The evidence presented in this

¹⁷ The full set of coefficient estimates are reported in Table A3. We do not interpret any of the coefficients on
human capital since they are there only as control variables.

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