Minimum Wages and the Gradients of Informality” with Ellora Derenoncourt, François Gérard and Lorenzo Lagos

Abstract:

This paper studies how the minimum wage affects wages and employment in the informal sector in Brazil, a country where 40% of the workforce is informal and where the real minimum wage doubled between 1999 and 2009. We develop a methodology to estimate the pass-through of minimum wage increases into the informal sector, and we measure and report the own-wage reallocation elasticity -- the percent shift out of formal employment associated with a 1 percent increase in wages. Using detailed labor force surveys and administrative data with information on formality status, we uncover a full pass-through of minimum wage increases into the wages of informal workers employed in formal firms, who account for about half of all informal employees. As a result of this full pass-through, we find a small formal-to-informal reallocation elasticity with respect to the formal wage of 0.28.  Our findings illustrate how minimum wage increases can have large effects on living standards for the hundreds of millions of low-income people working in the informal sector in developing countries.