The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica
Katherine Terrell and
Fatma El-Hamidi
No 479, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan
Abstract:
This paper tests the impact of the Costa Rican minimum wage policy on wage inequality and the level of employment in the formal sector (covered by minimum wage legislation) and the informal (uncovered) sector. We also examine the redistributive effects of the minimum wage, between the covered sector and the uncovered sector. Regression analysis using micro data from the Labour Force Surveys over 17 years reveals three important findings. At the median, a unit increase in the minimum wage relative to the average wage is associated with: a) a reduction in wage inequality in the covered sector of between 0.9 percent (using the Gini) and 1.7 percent (using the Theil mean logarithmic deviation) and there is no effect on earnings inequality among the self-employed (using all measures); b) an increase in the level of covered sector employment by 0.56 percent, but no effect on the number of self-employed over time; c) an increase in the average number of hours worked per week by 0.14 percent in the covered sector and 0.34 percent in the uncovered sector. From a theoretical perspective, these finds are counter to the traditional competitive two-sector models of the minimum wage. We interpret them as supporting the monopsonistic and efficiency wage models of the labour market in those industries where the ratio of the minimum wage to the average wage ("toughness") is low but supports the traditional models in those industries where toughness is high. Given that we found overall employment to have increased, minimum wages could be seen as assisting the reallocation of labour from the traditional to the more modern sectors.
Keywords: minimum wages; employment; wage inequality; monopsony; Costa Rica (search for similar items in EconPapers)
Pages: 24 pages
Date: 2001-04-01
New Economics Papers: this item is included in nep-ent, nep-lab and nep-lam
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)
Downloads: (external link)
http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp479.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp479.pdf [302 Found]--> https://wdi.umich.edu/files/Publications/WorkingPapers/wp479.pdf)
Related works:
Chapter: The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:2001-479
Access Statistics for this paper
More papers in William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109. Contact information at EDIRC.
Bibliographic data for series maintained by WDI ().