Low-Skilled Workers and the Effects of Minimum Wage: New Evidence Based on a Density-Discontinuity Approach

We estimated the impact of the minimum wage on wages, unemployment, and formal-informal sector mobility for women in the domestic-work sector in Uruguay. Applying the dual-economy, density-discontinuity design developed by Jales (2017), we used cross-sectional data for 2006-2016 from the National Household Survey and found that the minimum wage had significant effects on labor outcomes, with almost 20% of women increasing their wages to reach the minimum. This effect was observed in both the formal and informal sector, though the latter was not covered by the policy. Our results showed a drop in employment as well as a significant effect on sector mobility with negative impacts on formality. Nevertheless, these undesired effects were offset by other labour policies undertaken in the period, by sustained economic growth, and by improvement in labor- market conditions. A novel identification strategy that is particularly suited to developing countries provides empirical evidence regarding the effects of a minimum wage on women workers in the informal sector.