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. I show 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. I apply 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% 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.

Document Type

Working Paper


Fall 10-2015


Minimum wage, informality, unemployment, density discontinuity design, wage inequality, labor tax revenues, formal sector




Working Papers Series


Economics | Income Distribution | Public Affairs, Public Policy and Public Administration | Work, Economy and Organizations



Additional Information

Working paper no. 184

The author is grateful to Thomas Lemieux for his advice during this project. This paper benefited from extensive discussions with Joseph Doyle, Nicole Fortin, David Green, Vadim Marmer, Craig Riddell, Pierre Brochu, Alfonso Flores-Lagunes and Sergio Firpo. He also thanks the participants at the ESEM, EALE, IAAE, CLSRN, SBE and CEA conferences and the participants at the EESPFGV, UFMG, UBC and SFU academic seminars for helpful suggestions that improved the quality of this paper. All remaining errors are his own.

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