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



find spikes at the minimum wage for workers in the formal sector in Brazil, Chile, Colombia,
Brazil, and Honduras but not in Argentina, Mexico or Uruguay. Castillo-Freeman and Freeman
(1992) find a significant spike in the distribution of wages at the minimum wage in Puerto Rico.
Strobl and Walsh (2003) also find some evidence that with the introduction of the minimum
wage the largest spike in the distribution of wages moved up the distribution towards the
minimum wage in Trinidad and Tobago.

The evidence using more traditional econometric techniques is also mixed. Bell (1997)
uses time-series data to regress the log of manufacturing wages on the log of minimum wages,
the log of real GNP for Mexico and Colombia. She finds that minimum wages do not have a
significant impact on wages in Mexico, but do have a significant impact (with an elasticity of
0.37) in Colombia.4 Rama (2001), who examines the consequences of doubling the minimum
wage in Indonesia, finds that this 100% change in the minimum wage increased average wages
by 5-15%.

Neither Bell nor Rama estimate the impact of legal minimum wages on the wages of
workers separately for the formal the informal sectors, whereas Maloney and Nunez (2002) and
Fajnzylber (2001) use panel data from Colombia and Brazil (respectively) to estimate the impact
of legal minimum wages on the wages of workers in both the formal and informal sectors.
Maloney and Nunez (2002) define the informal sector as the self-employed while Fajnzylber
(2001) presents estimates for two definitions of the informal sector: self-employed and
unregistered employees. Both of these studies find large significant effects of minimum wages
on wages of formal sector employees initially earning within 10% above or below the minimum
wage: Maloney and Nunez (2002) report an elasticity of 0.6 for workers with initial wages near
the minimum wage in Colombia, while Fajnzylber (2001) report an elasticity of 1.08 in Brazil.5
With respect to the impact on workers in the informal sector, Maloney and Nunez find that
minimum wages do not have a significant effect on the wages of self-employed workers near the
minimum wage. Fajnzylber finds that the impact on the wages of informal sector workers is not
only significant, but also larger than the impact on formal sector workers: he estimate an
elasticity of 1.03 for unregistered paid employees and 1.32 for self-employed workers.

3 In this section we review the literature on the impact of legal minimum wages on wages. We do not review articles
that only estimate the impact of legal minimum wages on employment without first estimating the impact on wages
4 Bell (1997) also estimates time-series equations that include lagged wages as an independent variable. In this
specification, minimum wages do not have a significant effect on wages in either Colombia or Mexico.

5 This implies that a 1% increase in minimum wages raises the wages of paid employees by more than 1%., which
strikes us as large and makes us question whether the minimum wage variable is not picking up other factors which
affect both minimum wages and wages.



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