Real Minimum Wage and Informal Employment in Iran

This study investigates the effects of real minimum wage on informal employment in rural and urban areas of provinces of Iran between 2005 and 2018. For this aim, by applying microdata on the income-expenditure plan of urban and rural households and with the aid of the minimum wage index, the ratio of informal employment to total employment was calculated. Preliminary data analysis shows that one-third of urban employees and more than half of rural employees are engaged in informal occupations during this period. Then, the research model was estimated using the panel data method. Estimating the random effects model shows that the real minimum wage and tax burden positively affect informal employment in urban areas. In rural areas, the estimation using the Fixed effects method (and FGLS estimator) shows that real minimum wage, tax burden, and Gini coefficient positively affect informal employment. Furthermore, the interactive effect coefficient of real minimum wage considering the unemployment rate illustrates that in urban areas, the increase of unemployment rate increases the positive effect of real minimum wage. In rural areas, the increasing unemployment rate reduces the positive effect of the real minimum wage.