market is crucial to the dualistic nature of developing economies in the Lewis model and a key
characteristic of the Lewis model is that wages in the urban formal sector are higher than in the
rural informal sector. Ranis and Fei (1961) note that the persistence of an urban/rural wage gap
as assumed by Lewis must be "sustained by institutional or nonmarket forces since under
competitive assumptions real wages [in the formal sector] would fall to zero, at equality with the
MPP [the marginal physical product in agriculture]" (p.536.) Harris and Todaro (1970) also
ascribe the urban/rural wage gap to "the existence of a politically determined minimum urban
wage at levels substantially higher than agricultural earnings" (p.126.) Fields (1975) extends the
concept of economic dualism to the urban sector, arguing that differential enforcement of legal
minimum wages can lead to an institutionally-determined high wage in the urban formal sector
and a lower competitive wage in the urban informal sector. As Ranis and Stewart (1999, p. 260)
put it, "In most less developed countries (LDCs), governments with limited administrative
resources tend to focus on large-scale operations when trying to collect taxes or enforcement of
minimum wage legislation."
In this paper, we first ask whether legal minimum wages have a significant impact on the
wages paid to workers in the developing economy of Costa Rica and then we examine the
relationship between the legal minimum wage and economic dualism. In particular, we examine
whether the evidence is consistent with the hypothesis that legal minimum wages are enforced in
the formal sector but not in the informal sectors in Costa Rica. We divide the labor market into
five sectors: an urban formal sector (urban employees in large firms), three sectors often
considered "informal" but where legal minimum wages are legally applicable in Costa Rica
(urban employees in small firms, rural employees in large enterprises and rural employees in
small enterprises), and an informal sector where legal minimum wages are not legally applicable
(self-employed workers.) If legal minimum wages are enforced only in the urban formal sector
and hence are a cause of dualism between urban and rural sectors, or between large and small
firms, we would expect to find that higher minimum wages result in higher wages in the urban
formal sector but do not raise the wages of workers in the rural sector or in small firms (even
though legal minimum wages are legally applicable to these workers). On the other hand, if
legal minimum wages are enforced in all sectors where they are legally applicable, we would
expect to find that higher legal minimum wages result in higher wages for all types of employees
covered by minimum wage law, whether they work in large firms, small firms or in rural areas.
Furthermore, in this case we would expect higher minimum wages to have a larger impact on the
wages of workers in those sectors with lower average wages and more workers earning near the