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Minimum Wages, Inequality, and the Informal Sector

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  • Rafael Machado Parente

Abstract

How do minimum wages affect earnings inequality in countries with large informal sectors? I provide reduced-form evidence that the 2000s minimum wage hike in Brazil raised overall inequality by increasing inequality inside the informal sector. I develop a model where heterogeneous firms select into informality to investigate when and how raising the minimum wage can increase inequality. I calibrate the model to Brazil and find that, by generating substantial informality, the increase in the minimum wage raised overall inequality by 6.4%. These results suggest that movements into and out of the informal sector modulate the effects of formal labor legislation.

Suggested Citation

  • Rafael Machado Parente, 2024. "Minimum Wages, Inequality, and the Informal Sector," IMF Working Papers 2024/159, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2024/159
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    Keywords

    Minimum wages; Inequality; Informality; effects of the minimum wage; earnings histogram; share decomposition; earnings distribution; decomposition of informality; Wages; Income inequality; Wage adjustments; Caribbean; Global;
    All these keywords.

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