The Lighthouse Effect and Beyond

Tito Boeri, Pietro Garibaldi and Marta Ribeiro

No 193, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: A large body of empirical literature indicates that, contrary to predictions from economic theory, wages in the informal sector increase after a minimum wage hike. This phenomenon was so far explained as a byproduct of a signal (a lighthouse) conveyed by statutory minima to wage setting in the informal sector. A simple matching model shows that an increase in wages in the informal sector may also be induced by significant sorting and composition effects between the formal and the shadow sectors in the aftermath of the increase in the minimum wage. Using data on Brazil, we find that sorting accounts for at least one third of the increase in average wages in the informal sector after a minimum wage hike. This contribution of endogenous sorting to wage dynamics in the informal sector is also increasing over time.

Keywords: Minimum wage; Lighthouse effect; Sorting (search for similar items in EconPapers)
JEL-codes: J30 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: THE LIGHTHOUSE EFFECT AND BEYOND (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cca:wpaper:193

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