prices in response to the increase in labor costs (Lemos, 2004b). It was easier for them to raise prices during periods of inflation like the years used for this study (1982‐2000).

Although in developing countries like Brazil the minimum wage policy applies to both the public and the private sector, there is evidence that the government does not respond to minimum wage increases to the same extent as the private sector. A study by Lemos (2007) based on monthly data from household surveys covering the period 1982‐2000 shows that in the short term the minimum wage in Brazil did not have an adverse effect on employment overall or on the public or the private sector considered separately. However, jobs were lost in the private sector and gained in the public sector over the long term, suggesting an inelastic demand for labor. The increase in the public sector would largely offset the contraction in the private sector, with a net result that the minimum wage had very little effect on the overall economy.

The empirical literature on the developing countries has also looked at the adjustments that businesses have made depending on their size and cost structure. For example, Gindling and Terrell (2009) examined the effect of changes in the minimum wage on employment in Honduras based on panel data for the years 1990‐2004. These authors estimated −0.46 percent elasticity for large companies, while with small companies the minimum wage had a positive impact on employment, clearly reflecting the movement of workers who lost their jobs in the large companies to the smaller ones. As in Costa Rica, variations in the minimum wage had a greater effect on employees with less education who were working in smaller companies. An earlier study by El‐Hamidi and Terrell (2001), based on employment information in Costa Rica for 1980‐ 1992, showed that the minimum wage policy actually helped to create jobs in the country, mainly because of an increase in qualified employment. According to these authors, the industries that hired a highly qualified workforce were either facing a monopsonistic labor market or paying an efficiency wage that enabled them to increase their employment levels.

A more recent study by Alaniz et al. (2011) focused on the situation in Nicaragua, a country that has typically had high wages relative to the national average (a ratio of 0.53 for the mean minimum wage to the mean wage for 1998 and 2006 and a high median wage (a ratio of 0.81). Like several other Central American countries, Nicaragua has a system of multiple minimum wages for different sectors (14 sectors in all). The Alaniz study looked at variations in the minimum wage by state and by year to analyze the effects on employment. The authors used panel household data from 1998 through 2006 to show that increases in the sectoral minimum wage reduced the probability of being employed in the private sector. A 10 percent increase in the minimum wage reduced the probability of workers remaining employed in the private sector by 3.1 percentage points. However, this finding was only seen in large companies where there is greater compliance with minimum wage laws. The contraction in employment was the result of not only mass layoffs in the private sector, but also a reduction in the generation of new jobs in the private sector. In Peru, Céspedes (2005) also found evidence of adverse effects on employment for the period 1993‐2003, with an elasticity of −0.13 for the formal sector, which 9