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The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil

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Sara lemos ()

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Abstract

The minimum wage literature is very limited on empirical evidence for developing countries. This already limited literature is even more limited on the effects of the minimum wage in the informal sector, where most of the poor are. Extending the understanding of minimum wage effects both in developing countries and in particular in the informal sector is crucial if the minimum wage is to be used as a policy to help poor people in poor countries. This paper estimates wage and employment effects, accounting for sorting into the formal and informal sectors. The data used is a monthly Brazilian household survey from 1982 to 2000 at individual and regional levels. The formal and informal sectors employment effects were both found to be negative, consistent with the presence of a large spike, substantial spillover effects, and the associated compression effect in the wage distribution of both sectors. This suggests a downwards sloping labour demand curve in both sectors, challenging the standard Two Sectors Model as inadequate to explain the effect of the minimum wage on the formal and informal sectors in Brazil and in Latin America more generally.

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File URL: http://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp04-8.pdf
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Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 04/8.

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Date of creation: Mar 2004
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Handle: RePEc:lec:leecon:04/8

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Keywords: minimum wage; wage effect; employment effect; informal sector; Brazil;

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Find related papers by JEL classification:
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Katherine Terrell & Fatma El Hamidi, 2001. "The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica," William Davidson Institute Working Papers Series 479, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  3. Ricardo Paes de Barros & Carlos Henrique Corseuil & Miguel N. Foguel & Philippe G. Leite, 2001. "Uma avaliação dos impactos do salário mínimo sobre o nível de pobreza metropolitana no Brasil," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 2(1), pages 47-71, January-J.
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  5. Pablo Fajnzylber, 2001. "Minimum Wage Effects Throughout the Wage Distribution: Evidence from Brazil's Formal and Informal Sectors," Anais do XXIX Encontro Nacional de Economia [Proceedings of the 29th Brazilian Economics Meeting] 098, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  6. David Neumark & William Wascher, 1992. "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 46(1), pages 55-81, October.
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  9. Sebastian Edwards & Alejandra Cox Edwards, 2002. "Social Security Privatization Reform and Labor Markets: The Case of Chile," NBER Working Papers 8924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Dickens, Richard & Machin, Stephen & Manning, Alan, 1999. "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 1-22, January. [Downloadable!] (restricted)
    Other versions:
  12. Welch, Finis R & Cunningham, James, 1978. "Effects of Minimum Wages on the Level and Age Composition of Youth Employment," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 140-45, February. [Downloadable!] (restricted)
  13. Sara Lemos, 2003. "Political Variables as Instruments for the Minimum Wage," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] f08, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
    Other versions:
  14. Zadia M. Feliciano, 1998. "Does the Minimum Wage Affect Employment in Mexico?," Eastern Economic Journal, Eastern Economic Association, vol. 24(2), pages 165-180, Spring. [Downloadable!]
  15. Zavodny, Madeline, 2000. "The effect of the minimum wage on employment and hours," Labour Economics, Elsevier, vol. 7(6), pages 729-750, November. [Downloadable!] (restricted)
  16. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August. [Downloadable!] (restricted)
  17. Edwards, Sebastian & Edwards, Alejandra Cox, 2002. "Social Security Privatization and Labor Markets: The Case of Chile," Economic Development and Cultural Change, University of Chicago Press, vol. 50(3), pages 465-89, April.
  18. Bell, Linda A, 1997. "The Impact of Minimum Wages in Mexico and Colombia," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S102-35, July. [Downloadable!] (restricted)
  19. Baker, Michael & Benjamin, Dwayne & Stanger, Shuchita, 1999. "The Highs and Lows of the Minimum Wage Effect: A Time-Series Cross-Section Study of the Canadian Law," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 318-50, April. [Downloadable!] (restricted)
  20. Burkhauser, Richard V & Couch, Kenneth A & Wittenburg, David C, 2000. "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 653-80, October. [Downloadable!] (restricted)
  21. Maloney, William F, 1999. "Does Informality Imply Segmentation in Urban Labor Markets? Evidence from Sectoral Transitions in Mexico," World Bank Economic Review, Oxford University Press, vol. 13(2), pages 275-302, May.
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  23. R. Hirschowitz, 1989. "The Other Path: The Invisible Revolution in the Third World," South African Journal of Economics, Economic Society of South Africa, vol. 57(4), pages 266-272, December. [Downloadable!] (restricted)
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  25. Williams, Nicolas, 1993. "Regional Effects of the Minimum Wage on Teenage Employment," Applied Economics, Taylor and Francis Journals, vol. 25(12), pages 1517-28, December.
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  27. Lemos, Sara, 2004. "Are Wage and Employment Effects Robust to Alternative Minimum Wage Variables?," IZA Discussion Papers 1070, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  28. David Neumark & William Wascher, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Arslan Razmi, 2006. "Aspects of Informalization and Income Distribution in Developing Countries: A Modified Specific Factors Approach," Working Papers 2006-03, University of Massachusetts Amherst, Department of Economics. [Downloadable!]
  2. Sara Lemos, 2005. "Political Variables as Instruments for the Minimum Wage," Contributions to Economic Analysis & Policy, Berkeley Electronic Press, vol. 4(1), pages 1425-1425. [Downloadable!] (restricted)
    Other versions:
  3. Arnab K. Basu & Nancy H. Chau & Ravi Kanbur, 2007. "Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws," IZA Discussion Papers 2998, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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