The Consequences of Increased Enforcement of Legal Minimum Wages in a Developing Country

Abstract

In August 2010, the Costa Rican government implemented a comprehensive program to increase compliance with legal minimum wages, the Campaña Nacional de Salarios Mínimos (National Campaign for Minimum Wages). To evaluate the impact of the Campaign, the authors use a regression discontinuity (RD) approach, which compares what happened to workers who before the Campaign had been earning below the minimum wage to those who before the Campaign had been earning above the minimum wage. They analyze a panel data set with information on workers from before the Campaign began (July 2010) and after the Campaign had been in operation for some time (July 2011). The evidence supports the conclusion that the Campaign led to an increase in compliance with minimum wage laws in Costa Rica; the mean earnings of those being paid less than the minimum wage in 2010 increased by approximately 10% more than the earnings of those being paid more than the minimum wage. The Campaign led to the largest increases in the wages of women, younger workers, and less-educated workers. The authors find no evidence that the Campaign had a negative impact on the employment of full-time workers whose wages were increased. Weak evidence suggests that the Campaign had a negative impact on the employment of part-time private-sector employees. Although increased inspections mainly targeted minimum wage violations, the authors also observe an increase in compliance with a broader set of labor standards and a positive spillover effect relative to other violations of labor laws. Specifically, the analysis provides evidence that the Campaign had a positive impact on the probability that workers receive legally mandated nonwage benefits such as Social Security (which includes pension and health insurance), overtime pay, sick leave, and paid vacations.