IMF Working Papers

Minimum Wages, Inequality, and the Informal Sector

By Rafael Machado Parente

July 19, 2024

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Format: Chicago

Rafael Machado Parente. "Minimum Wages, Inequality, and the Informal Sector", IMF Working Papers 2024, 159 (2024), accessed October 19, 2024, https://doi.org/10.5089/9798400282843.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Income inequality, Labor, Minimum wages, National accounts, Wage adjustments, Wages

Keywords: Caribbean, Decomposition of informality, Earnings distribution, Earnings histogram, Effects of the minimum wage, Global, Income inequality, Inequality, Informality, Minimum wages, Share decomposition, Wage adjustments, Wages

Publication Details

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