Minimum Wages in a Segmented Labor Market: Evidence from South Africa

The segmented labor market model describes the impacts of minimum wages on covered and uncovered sectors. This paper examines the impacts of an industry-specific minimum wage in South Africa, a state characterized by high unemployment, a robust union movement, and the presence of a large informal sector. Under the industry-specific wage law, formal agricultural and household workers are covered, while workers in other sectors are not. The unique aspect of this paper lies in the ability to compare the impacts of minimum wage legislation on formal covered, informal covered, formal uncovered, and informal uncovered workers. This natural experiment allows us to test whether industry-specific minimum wage legislation leads to higher wages, whether wage increases are restricted solely to covered formal sectors or if there are spillover effects, and whether such legislation manifests in disemployment effects. We find evidence of higher wages yet disemployment among black workers in formal markets. In informal markets we find no employment effects, but higher wages in formal markets appear to have spilled over into informal markets in covered sectors.