## Minimum Wages, Inequality, and the Informal Sector

_IMF Working Papers, July 19, 2024_

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**Canonical URL:** [Minimum Wages, Inequality, and the Informal Sector](https://www.imf.org/en/publications/wp/issues/2024/07/19/minimum-wages-inequality-and-the-informal-sector-552066)

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## Bibliographic details
- Authors: Rafael Machado Parente
- Published: July 19, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400282843.001

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### Summary
- Research question: How do minimum wages affect earnings inequality in countries with large informal sectors?
- Empirical finding (reduced-form): The 2000s minimum wage hike in Brazil raised overall inequality by increasing inequality inside the informal sector.
- Model contribution: A model where heterogeneous firms select into informality is developed to investigate when and how raising the minimum wage can increase inequality.
- Calibration result: Calibrated to Brazil, the model finds that, by generating substantial informality, the increase in the minimum wage raised overall inequality by 6.4%.

### Key Findings and Evidence
- The 2000s minimum wage hike in Brazil is associated with:
  - An increase in overall earnings inequality.
  - An increase in inequality inside the informal sector.
- Quantified impact from model calibration:
  - Overall inequality increased by 6.4 percent due to the minimum wage increase, with informality playing a central role.

### Model and Methodology
- Model structure:
  - Firms are heterogeneous and choose whether to operate formally or informally (selection into informality).
  - The model is used to analyze the mechanisms through which minimum wage increases can affect inequality.
- Empirical approach:
  - Reduced-form evidence is provided linking the 2000s minimum wage hike in Brazil to distributional outcomes, particularly within the informal sector.
- Calibration:
  - The model is calibrated to Brazil to quantify the contribution of informality to the observed increase in inequality.

### Policy Implications and Interpretation
- Mechanism emphasized:
  - Movements into and out of the informal sector modulate the effects of formal labor legislation, such as minimum wage hikes.
- Implication for policy design:
  - Policymakers aiming to affect inequality through minimum wage policy should account for the size and dynamics of the informal sector, as standard formal-sector effects may be offset or reversed when informality responds to wage regulation.

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_Source: https://www.imf.org/en/publications/wp/issues/2024/07/19/minimum-wages-inequality-and-the-informal-sector-552066_