informal sector. To identify the urban informal sector, we use the most common definition used
in studies by the International Labor Office (ILO) and the U. N. Regional Employment Program
for Latin America and the Caribbean (known by the its Spanish acronym PREALC).
Specifically, we define the urban informal sector as those who work in firms with 5 or fewer
employees who do not have a university education and are not classified as professional or
technical employees.7 We also divide the informal sector into those informal sector workers
legally covered by minimum wages (the rural large-scale and small-scale enterprises and urban
small firms) and the part of the informal sector not explicitly covered by minimum wages (self-
employed workers in rural and urban areas). In summary, this breakdown leaves us with six
sectors: the urban formal sector, three informal sectors where minimum wages are legally
applicable to workers (the urban informal small firm sector, the rural large enterprise sector, the
rural informal small enterprise sector) and two informal sectors where workers are not covered
by minimum wages (urban self-employed and rural self-employed).
Our analysis of the impact of minimum wages on the wages of workers in the formal and
informal sectors is based on two methods: first comparing the distribution of minimum wages
and wages and then an econometric analysis of minimum wages changes and wage changes. We
begin by comparing kernel density functions of the wages of workers with kernel density
functions of the distribution of minimum wages. If minimum wages are having an effect, then
we should see spikes in the wage distribution around the minimum wages. However, evidence of
spikes cannot be interpreted as being caused by minimum wages since there are other possible
reasons why minimum wages and actual wage spikes may coincide. For example, both
minimum wages and the wages reported by survey recipients may cluster at round numbers,
wages may be standardized for sizeable trade or occupation groups, or actual wages and
minimum wages may cluster around discrete levels of human capital. To provide additional
evidence of the impact of minimum wages on actual wages in each sector we estimate the extent
to which changes in the minimum wage affect wages, holding constant other factors that might
affect wages, by using individual-level pooled cross-section/time-series data (1988-1999).
Specifically, we estimate separately for each sector an equation of the form:
JT
InWit = αo + a1lnMWit + X'tβ + δZit + Σ λjOCCitj + Σ γtYRt + μu,
j =1 t=1
(1)
7 Other ways besides firm size of identifying the informal sector are possible. However, as Ranis and Stewart
(1999) write “there is a strong correlation between smaller size enterprises and other criteria of informality” (p. 259).
8