Article thumbnail

Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica

By T.H. Gindling and Katherine Terrell


The classic dual economy models of developing countries hold minimum wages (among other institutions) accountable for persistent dualism. They note that applying or enforcing minimum wage laws in only one sector of the economy will create wage differentials which will not be eroded with labor mobility to the high wage sector. In this paper we use 12 years of micro data on thousands workers living in Costa Rica to test whether legal minimum wages have a differential impact on the wages of workers in the formal sector vs. informal sector, defined in various ways in accordance with the dual development models. The evidence from Costa Rica is contrary to the assumptions of these models. We find that increases in minimum wages not only raise the wages of workers in the urban formal sector (large urban enterprises) who are covered by minimum wage law, but they also increase the wages of all other workers covered by minimum wage legislation in what are traditionally regarded as informal sectors and where the legislation is often considered not to be enforced. Specifically, we provide evidence that minimum wages increase the wages of workers in small urban enterprises, large rural enterprises and small rural enterprises. Further, our results suggest that higher legal minimum wages raise the average wage of workers in these “informal” sectors more than in the urban formal sector. We concluded that in Costa Rica minimum wages are being enforced in the rural and small scale sectors and may actually work to reduce average wage differentials between these sectors and the urban formal sector. On the other hand, minimum wages have no significant impact on the wages of workers in another sector that is regarded as informal but which is not covered by minimum wage legislation: the self-employed workers (both urban and rural). Thus, one could argue that minimum wages may contribute to dualism between the formal and informal, defined as self-employed vs. salaried workers. However, we find no evidence of the bleaker scenario, that self-employed earnings are being lowered by minimum wages.dual economy, informal sector, minimum wages, wages, Costa Rica, Latin America

OAI identifier:

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.

Suggested articles


  1. (1961). A Theory of Economic Development,"
  2. (1954). Development with Unlimited Supplies of Labour," The Manchester School,
  3. (1993). Labor Market Institutions and Policies: Help or Hindrance to Economic Development?,"
  4. (1997). Labor Markets in Developing Countries: An Agenda for Research,”
  5. (2002). Measuring the Impact of Minimum Wages Evidence from Latin America” unpublished, World Bank.
  6. (1970). Migration, Unemployment and Development:
  7. (2004). Minimum Wage Effects Throughout the Labor Market in
  8. (2001). Minimum Wage Effects Throughout the Wage Distribution: Evidence From Brazil’s Formal and Informal Sectors,” Department of Economics, Universdade Federal de Minas Gerais, unpublished,
  9. (2003). Minimum Wages and Compliance: The Case of Trinidad and Tobago," Economic Development and Cultural Change,
  10. (1997). Minimum Wages and Poverty in Developing Countries: Some Empirical Evidence,"
  11. (1975). Rural-urban Migration, Urban Unemployment and Underemployment, and Job-Search Activity in LDC's,"
  12. (2002). The Effects of the Minimum Wage on Wages and Employment in Brazil: A menu of
  13. (1997). The Impact of Minimum Wages in Mexico and
  14. (1995). The Nature of Minimum Wages and Their Effectiveness a Wage Floor in Costa Rica,
  15. (1999). V-Goods and the Role of the Urban Informal Sector in Development,"
  16. (2001). What Happens When the Minimum Wage is
  17. (1992). When the Minimum Wage Really Bites: The Effect of the U.S.-Led Minimum on Puerto Rico,”
  18. (1990). World Development Report,