What happens to the wage structure, the contractual situation of workers and the level of employment when increases in the minimum wage are not in phase with the rest of the economy, e.g. when adjustments are well above the increase in consumer prices and gains in labour productivity over several years and at a time when the economy enters recession?

This paper answers this question by focusing on the Chilean situation between 1998 and 2000 and using the National Socio-Economic Characterization (CASEN) survey. Using the CASEN data makes it possible to disaggregate the analysis by firm size and sectors of the economy and thus to examine whether increases in the minimum wage might have contributed to the informalization of employment.

The main findings of the paper suggest that, in enterprises of all sizes and in all sectors of the economy, there has been an increase in the number of workers receiving less than or around the minimum wage, and that a larger number of workers did not have a written contract in 2000 than in 1998. It also suggests that the wage structure of enterprises remained largely unchanged following the rise in the minimum wage. In conclusion, one major objective of the minimum wage policy, e.g. the amelioration of living conditions of low-paid workers, could not be achieved within this context.

Finally, the paper draws attention to the necessity of carefully designing the minimum wage fixing machinery as such a situation was made possible because adjustments were based on economic forecasts that turned out to be unrealistic.