Center for Policy Research

Working Paper

Estimating the Effects of the Minimum Wage in a Developing Country: A Density Discontinuity Design Approach

Hugo Jales

C.P.R. Working Paper No. 184

September 2015

Hugo Jales

Economics Department

Center for Policy Research

Income

Labor

Hugo Jales

Abstract

This paper proposes a new framework to identify the effects of the minimum wage on the joint distribution of sector and wages in a developing country. Assistant Professor Hugo Jales shows that under reasonable assumptions, cross-sectional data on the worker's wage and sector can identify the joint distribution of the latent counterparts of these variables; that is, the sector status and wage that would prevail in the absence of the minimum wage. Jales applies the method in the “PNAD”, a nationwide representative Brazilian cross-sectional dataset for the years 2001 to 2009. The results indicate that the size of the informal sector is increased by around 39 percent compared to what would prevail in the absence of the minimum wage, an effect attributable to (i) unemployment effects of the minimum wage on the formal sector, (ii) movements of workers from the formal to the informal sector as a response to the policy.

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