Using annual data from Costa Rican Household Surveys for the 1988-1999 period, we
find that increases in minimum wages not only raise the wages of workers in the urban formal
sector (large urban enterprises) who are covered by minimum wage law, but they also increase
the wages of all other workers covered by minimum wage legislation in what are traditionally
regarded as informal sectors and where the legislation is often considered not to be enforced.
Specifically, we provide evidence that minimum wages increase the wages of workers in small
urban enterprises, large rural enterprises and small rural enterprises. Further, our results suggest
that higher legal minimum wages raise the average wage of workers in these “informal” sectors
more than in the urban formal sector. We concluded that in Costa Rica minimum wages are
being enforced in the rural and small scale sectors and may actually work to reduce wage
differentials between these sectors and the urban formal sector. On the other hand, minimum
wages have no significant impact on the wages of workers in another sector that is regarded as
informal but which is not covered by minimum wage legislation: the self-employed workers
(both urban and rural). Thus, one could argue that minimum wages may contribute to dualism
between the formal and informal, defined as self-employed vs. salaried workers. However, we
find no evidence of the bleaker scenario, that self-employed earnings are being lowered by
minimum wages.
II. Literature Review
The literature on the on the impact of legal minimum wages on the wages of workers in
developing countries is sparse and the evidence is almost entirely on the effect for workers in the
formal sector.3 Recently a number of studies have appeared, many using data for Latin American
countries. Collectively they indicate that although enforcement is not stringent, minimum wages
are having a positive effect on wages of workers in the formal sector.
Several studies examine this issue by looking for spikes in the distribution of wages at or
near the legal minimum wage. Here the evidence is mixed for studies of Latin American
countries. Bell (1997) finds a spike in the distribution of wages that corresponds to the minimum
wage in Colombia but not in Mexico. She concludes that minimum wages have "virtually no
impact on the distribution of average wages reported by firms in Mexico" (p.S109) but do have
an effect on the wages of workers in Colombia. Fajnzylber (2001) and Lemos (2002) find
spikes in the distribution of wages near the minimum wage in Brazil. Maloney, et al. (2002)