minimum wage. That is, we would expect higher minimum wages to have a larger effect on the
wages of workers in the rural sector and in small firms than in the urban formal sector. Finally,
the minimum wage could also cause dualism between the sector that is covered by minimum
wage law and the informal sector where the minimum wage is not legally applicable (the self-
employed).
Our paper contributes to the literature that examines the indirect impact of institutions
and regulations in the formal labor market on the informal labor market, a topic that Harrison
and Leamer (1997) have identified as a gap in the literature. To examine these issues, we use
data from Costa Rica, a developing economy with a complex legal minimum wage structure. In
Costa Rica legal minimum wages are set separately for a large number of occupations, although
within occupations legal minimum wages apply to all employees irrespective of whether they
work in a rural or urban area, in large or small firms, part-time, or full-time. There were
important changes in the structure of minimum wages in Costa Rica during the period that we
study. Whereas at one point there were over 500 wages set by industry and occupational
categories, from 1988 to 1999 the structure of minimum wages was greatly simplified such that
today there are only 19 minimum wages, set by skill level. An aspect of the Costa Rica minimum
wage structure which makes it valuable for research is that these changes in the structure of
minimum wages over the 1988-1999 period resulted in variation over time and within
occupations in the minimum wages that were exogenous to changes in the labor market.
Because we use these frequent (at least once a year) exogenous variations to estimate the impact
of minimum wages on wages, unlike most previous studies, our results do not suffer from
potential endogeneity bias.
In this paper, we make use of the entire set of multiple legal minimum wages at each
point to estimate the impact of legal minimum wages on the wages of workers. Multiple
minimum wages are not uncommon in Latin America. In Mexico, for example, legal minimum
wages are set separately for three regions and 88 occupations. It is surprising, therefore, that our
work (this paper and Gindling and Terrell, 2004) are the only studies that we know of that fully
take into account this complex minimum wage structure in examining the impact of minimum
wages on wages and employment in Latin America. Most published empirical analyses of the
impact of legal minimum wages in Latin America make the simplifying assumption that the only
one minimum wage (generally the lowest legal minimum wage for all regions and occupations)
applies to all workers, regardless of occupation.