The effect of minimum wages on actual wages in formal and informal sectors in Costa Rica

As in many economies, wage gaps between formal and informal sectors have been persistent in Costa Rica. Using 12 years of microdata, we test whether increases in minimum wages raise actual wages; we find they not only raise wages in large urban and rural enterprises (traditionally referred to as formal), but they also raise wages of workers covered by minimum wage legislation in what are traditionally regarded as informal sectors where the legislation is often considered not to be enforced: small urban and small rural enterprises. Furthermore, minimum wages raise wages in these informal sectors more than in larger firms and hence work to reduce wage differentials between the larger and smaller firms. However, minimum wages have no significant impact on wages in the informal sector not covered by minimum wage legislation, the self-employed. (c) 2005 Elsevier Ltd. All rights reserved.