Behind the lighthouse effect

Arbeitspapier

A large body of empirical literature indicates that, contrary to predictions from economic theory, wages in the informal sector increase after any minimum wage hike. This phenomenon was so far explained as a byproduct of a signal conveyed by statutory minimum wages to wage setting in the informal sector, as if workers in the latter had significant bargaining power. A simple matching model shows that the lighthouse effect may be induced by significant sorting and composition effects between the formal and shadow sectors in the aftermath of the increase in the minimum wage. Using data on Brazil, we test this alternative explanation of the lighthouse effect, associated with the endogenous sorting of workers by skill in the formal and informal sectors. We find that sorting accounts for at least one third of the increase in average wages in the informal sector after the minimum wage hike. This contribution of sorting to wage dynamics in the informal sector is also increasing over time.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 4890

Classification and Topics

• Classification: Wirtschaft ; Wages, Compensation, and Labor Costs: General
• Subject: Minimum wage ; lighthouse effect ; sorting ; Lohnbildung ; Informeller Sektor ; Mindestlohn ; Arbeitsmarkt ; Matching ; Qualifikation ; Schätzung ; Brasilien

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Boeri, Tito ; Garibaldi, Pietro ; Ribeiro, Marta
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/36956
• Last update: 10.03.2025, 11:42 AM CET