Minimum Wages in Formal and Informal Sectors: Evidence from the Colombian Crisis


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Abstract: I estimate the effect of the minimum wage on formal wages, informal wages, and employment in Colombia. I exploit an unexpected increase in the real minimum wage during the 1999 Colombian economic crisis to estimate short- term effects of the minimum wage along the distribution of wages in both sectors. I find evidence of wage responses, with a stronger incidence in the formal sector. Markets with a 10 % higher incidence of the minimum wage, measured by the number of workers affected, experienced wage increases of 4 % and 1.3 % in the formal and informal sector, respectively. I find negative employment effects on the informal sector, but no employment effects on the formal sector, and a lack of pass-through across sectors. My results suggest that minimum wages affect the informal labor market directly and not through the formal sector.