Minimum Wages, Inequality, and the Informal Sector
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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.
Series:
Working Paper No. 2024/159
Subject:
Income inequality Informal employment Labor Labor demand Labor force Labor share Labor supply Minimum wages National accounts Wage adjustments Wages
Frequency:
regular
English
Publication Date:
July 19, 2024
ISBN/ISSN:
9798400282843/1018-5941
Stock No:
WPIEA2024159
Format:
Paper
Pages:
84
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