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Abstract
This paper studies the labor market effects and firms’ margin of response of a minimum wage increase in a country with large informal self-employment. I show that employment elasticities are negative and larger than recent estimates in the literature; and this is driven by firms facing higher competition with the informal sector. I find that some workers are unequivocally reallocated towards self-employment, which is consistent with a model with worker sorting across formal-informal sector, firms facing imperfect competition, and labor rationing. I also show that medium and large firms were able to pass-through the increased labor cost to consumers through higher prices; and these products were consumed the most by high income individuals and households. Finally, a back-of-the-envelope analysis shows that the minimum wage had muted efficiency gains, as well as negligible redistribution of resources towards lower income households due to the absence of formal workers in their household composition.
Figure 5: Effect on formal employment between occupations with high vs low presence in the informal sector
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Citation
Corcuera, Paul. 2024. “Minimum Wages and Informal Self-Employment: Evidence from Peru.” Working Paper. –>