The Effects of Multiple Minimum Wages Throughout the Labor Market

This paper investigates the effects of legal minimum wages on wages, employment, hours worked and monthly earnings among workers covered by minimum wage legislation as well as those for whom it does not apply (the uncovered sector) in Costa Rica. This country’s large uncovered sector and complex minimum wage policy, which has for decades set numerous wages throughout the wage distribution, provide a stimulating counterpoint to the U.S. framework for the analysis of the impact of minimum wages. We find that legal minimum wages have a significant positive effect on the wages of workers in the covered sector (with an elasticity of 0.10) but no effect on wages of workers in the uncovered sector. We also find that a 10% increase in minimum wages lowers employment in the covered sector by 1.09% and decreases the average number of hours worked of those who remain in the covered sector by about 0.6%. Finally, we show that despite the wide range of minimum wages, the largest impact on the wages and employment of covered sector workers is in the lower half of the distribution.http://deepblue.lib.umich.edu/bitstream/2027.42/40087/3/wp701.pd

Minimum Wages, Inequality and Globalization

This paper contributes to our understanding of the impact of institutions on incomes of workers in developing countries by rigorously addressing the question as to whether changes in minimum wages can change the inequality of the distribution of earnings. More specifically, we analyze whether changes in Costa Rica’s complex institution of multiple minimum wages in the 1980s and 1990s acted as a countervailing force to the unequalizing effect of globalization. Using annual data on workers from the 1987-1997 household surveys, it is shown that changes in the legal minimum wages did indeed have an effect on wage inequality and that these changes would not have been captured using the simple interpretation of minimum wages found in much of the literature.http://deepblue.lib.umich.edu/bitstream/2027.42/40086/3/wp700.pd

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

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.http://deepblue.lib.umich.edu/bitstream/2027.42/40033/3/wp647.pd

The Impact of Minimum Wages on Wages, Work and Poverty in Nicaragua

In this paper we use an individual- and household-level panel data set to study the impact of changes in legal minimum wages on a host of labor market outcomes including: a) wages and employment, b) transitions of workers across jobs (in the covered and uncovered sectors) and employment status (unemployment and out of the labor force), and c) transitions into and out of poverty. We find that changes in the legal minimum wage affect only those workers whose initial wage (before the change in minimum wages) is close to the minimum. For example, increases in the legal minimum wage lead to significant increases in the wages and decreases in employment of private covered sector workers who have wages within 20% of the minimum wage before the change, but have no significant impact on wages in other parts of the distribution. The estimates from the employment transition equations suggest that the decrease in covered private sector employment is due to a combination of layoffs and reductions in hiring. Most workers who lose their jobs in the covered private sector as a result of higher legal minimum wages leave the labor force or go into unpaid family work; a smaller proportion find work in the public sector. We find no evidence that these workers become unemployed. Our analysis of the relationship between the minimum wage and household income finds: a) increases in legal minimum wages increase the probability that a poor worker’s family will move out of poverty, and b) increases in legal minimum wages are more likely to reduce the incidence of poverty and improve the transition from poor to non-poor if they impact the head of the household rather than the non-head; this is because the head of the household is less likely than a non-head to lose his/her covered sector employment due to a minimum wage increase and because those heads that do lose covered sector employment are more likely to go to another paying job than are non-heads (who are more likely to go into unpaid family work or leave the labor force).minimum wages, employment, poverty.

Minimum Wages, Globalization and Poverty

To be competitive in the global economy, some argue that Latin American countries need to reduce or eliminate labor market regulations such as minimum wage legislation because they constrain job creation and hence increase poverty. On the other hand, minimum wage increases can have a direct positive impact on family income and may therefore help to reduce poverty. We take advantage of a complex minimum wage system in a poor country that has been exposed to the forces of globalization to test whether minimum wages are an effective poverty reduction tool in this environment. We find that minimum wage increases in Honduras reduce extreme poverty, with an elasticity of -0.18, and all poverty, with an elasticity of -0.10 (using the national poverty lines). These results are driven entirely by the effect on workers in large private sector firms, where minimum wage legislation is enforced. Increases in the minimum do not affect the incidence of poverty in sectors where minimum wages are not enforced (small firms) or do not apply (self-employed and public sector).http://deepblue.lib.umich.edu/bitstream/2027.42/61184/1/IPC-working-paper-075-GindlingTerrell.pdfhttp://deepblue.lib.umich.edu/bitstream/2027.42/61184/4/Terrell-Gindling Honduras_Poverty 08-13-08fin.pd

Minimum Wages and the Welfare of Different Types of Workers in Honduras

Taking advantage of a complex minimum wage structure in Honduras, this paper examines how changes in minimum wages over the 1990-2004 period affect unemployment as well as the employment and average wages of workers in different sectors of the economy: medium and large-scale firms v. small firms in the private sector (where minimum wage legislation applies)and for civil servants and self-employed workers (where it does not apply). The evidence suggests that minimum wages are effectively enforced only in medium and large-scale firms, where a 1% increase in the minimum wage leads to an increase of 0.29% in the average wage and a reduction in employment of -0.46%. There is evidence that increases in the private sector minimum wage are emulated in public sector wages, but there are no disemployment effects there. We also find evidence that a higher minimum wage may increase unemployment (although the estimates are not robust). There are no discernable effects of minimum wages on the wages workers in smallfirms or the self-employed. Separate estimates of the wage and employment effects for workers in each of four education levels indicate that higher minimum wages have larger positive effects on the wages of the primary and secondary educated but the largest disemployment effect is on workers with primary education in large private firms. We conclude that, even in the sector where minimum wages are enforced and even under our upper bound estimate of the effect on the wages of workers, the welfare -- the total earnings -- of low-paid workers in the large-firm covered sector falls with higher minimum wages.http://deepblue.lib.umich.edu/bitstream/2027.42/55759/4/IPC-working-paper-045GindlingTerrell.pd

Final technical report / The Impact of Minimum Wage on Labour Markets in Central America : A Comparative Analysis of Costa Rica, El Salvador and Nicaragua, 1 January 2008 – 30 June 2010

Paid employees in small firms and in domestic service (associated with informality) earn less than the legal minimum wage when compared to paid employees in large firms or in the public (or formal) sector. This report outlines project research and outputs. Results suggest that in all three countries minimum wages affect only a sub-set of workers, mostly full-time formal sector workers in large firms who earn within or near the middle of the distribution of wages. In terms of policy: minimum wages will help low-paid workers, and decrease inequality and poverty, where programs support low-paid workers who lose their jobs