effect of increases in the minimum wage and greater compliance with legislation on the employment of men in the formal sector. The results of this study again support the hypothesis that a higher minimum wage contributes to the growth of informal employment. Thus, minimum wage increases make it more probable that a formal worker will end up working in the informal sector or being self‐employed. It was also found that the minimum wage, while reducing the chances of unemployment and inactivity, also discouraged the hiring of new employees.

In Indonesia, Bird and Manning (2002)<sup>6</sup> estimated the impact of the minimum wage on the formal and informal employment of workers in the urban sector over the period 1990‐2000. Based on panel data from the provinces, this analysis concluded that the informal sector grew during the period, mainly due to the displacement of workers from the modern sector of the economy and the contraction of formal employment following increases in the minimum wage. These results for Indonesia were corroborated by Comola and de Mello (2011) in a recent study of individual workers covering the period 1996‐2004, but these authors also found that the increases in informal employment more than offset the losses in formal employment, resulting in a net positive effect.

These findings notwithstanding, a recent study on Indonesia by Magruder (2013) indicated that in economies with high labor productivity where the minimum wage is set on the basis of local conditions, introduction of this policy can stimulate an economy’s development—an outcome known in the economic literature as the _big push effect_ . Based on panel data for the 1990s, Magruder (2013) showed that increases in the minimum wage at the district (kabupaten) level generated greater local demand (measured in terms of expenditure), which led in turn to a greater demand for labor. Such results would be consistent with the expansion of formal employment and contraction of informal employment. However, these trends are only observed in non‐tradable sectors of the economy.

Recent evidence in Nicaragua corroborates the predictions of the dual labor market model (Alaniz et al., 2011). During the period 1998‐2006, increases in the minimum wage were followed by reduced employment in the private sector. At the same time, there was an increased probability that workers in the private sector who were affected by the minimum wage would drop out of the labor market and find jobs in the public sector or spend more time on unpaid family activities. In the case of Honduras, Gindling, and Terrell (2009) found indications that smaller businesses, which tend to be less strict about compliance with minimum wage laws, absorbed many of the workers who were previously employed by large and medium‐sized firms and lost their jobs because of the new labor costs triggered by increases in the minimum wage. A 10 percent increase in the minimum wage corresponded to a 3.9 percent rise in employment in the latter sector. Alth0ugh the study did not provide disaggregated information by groups, it is assumed that the workers who lost their jobs were either less productive (young workers, women, low‐skilled workers) or working in less productive industries.

> 6 See Comolla et al.  (2011).

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