The effect of minimum wages on prices in Brazil

There is very little evidence on the effects of the minimum wage on prices in the international literature and none \nwhatsoever for developing countries. This paper analyzes the effects of the minimum wage on prices using monthly \nBrazilian household and price data from 1982 to 2000 aggregated at a regional level. A number of conceptual and \nidentification questions are discussed, for example: (1) Empirical evidence on price effects might help to answer the \nquestion of who pays for the higher costs: firms, consumers, or unemployed. The answer to this question is important for \nthe controversial recent minimum wage debate. Employment might not be affected if firms are able to pass through to \nprices the higher labour costs associated to a minimum wage increase. (2) If the poor are the consumers of minimum \nwage labour intensive goods, or if these goods represent a large proportion of their consumption bundle, then minimum \nwage increases might hurt rather than aid the poor. Furthermore, if minimum wage increases are passed on to consumer \nprices causing inflation, they might again hurt the poor, who disproportionately suffer from inflation. This is particularly \nso in the presence of hyperinflation; even more so if the minimum wage has been used as anti-inflation policy in addition \nto its social role, as in Brazil. Robustness checks on the price effects at a regional level, on low and high income \nconsumers and under low inflation are performed. Robust results indicate that minimum wage increases raise overall \nprices in Brazil. The resulting inflation is the same for the poor and the rich, smaller in low inflation periods, and larger \nin poorer regions.