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

paper suggests that in Costa Rica minimum wages are enforced, and do affect the wages of
workers, for all types of paid employees no matter whether they work in the traditionally-defined
formal sector or in a sector that is traditionally considered to be informal. Further, the estimated
impact of changes in legal minimum wages on average wages is larger for workers in rural and
small enterprises than in the urban large firm formal sector. This suggests that, at least in Costa
Rica, minimum wages do not cause labor market segmentation or dualism between the rural and
urban sectors nor between large and small firms. Rather, the evidence is consistent with the view
that legal minimum wages affect workers in the covered sector and, within that, in sectors where
more workers are likely to earn low wages, and therefore are more likely have market wages
below the institutionally-determined minimum wages. Thus, minimum wages may contribute to
reducing the wage gap between the urban formal sector and the informal sectors. Legal
minimum wages cannot be enforced among self-employed workers (over 20% of workers in
Costa Rica), and we find no evidence that minimum wages affect the wages of the self-employed
either positively or negatively. Thus, the evidence does provide support for the hypothesis that
minimum wages may play a role in segmenting the labor market between employees and the
self-employed.

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