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

29 Pages Posted: 28 Apr 2004

See all articles by Sara Lemos

Sara Lemos

University of Leicester; IZA Institute of Labor Economics

Date Written: March 2004

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.

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

JEL Classification: J38

Suggested Citation

Lemos, Sara, The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil (March 2004). IZA Discussion Paper No. 1089. Available at SSRN: https://ssrn.com/abstract=526023

Sara Lemos (Contact Author)

University of Leicester ( email )

University Road
Leicester LE1 7RH
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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