ABSTRACT
One would expect from the manner in which minimum wages are designed and changed over time that minimum wages would reduce inequality among Costa Rican workers in the covered sector. Their impact on the uncovered sector depends on whether the labor market is competitive or monopsonistic. If minimum wages do not reduce employment in the covered sector, and hence, have no spillover effects – the outcome in a monopsonistic model of the labor market – changes in minimum wages will not have an efficiency loss and may not affect wage inequality in the uncovered sector. The chapter examines the effects of changes in the minimum wage on earnings inequality and aggregate level of employment in Costa Rica’s covered and uncovered sectors over the 1980–1992 period. It also examines whether changes in the minimum wage lead to a reallocation of labor between the covered and uncovered sector.
