The Effect of the Minimum Wage on Prices in Brazil

There is very little empirical evidence on the effects of the minimum wage on prices in the\ninternational literature and none whatsoever for developing countries. This paper estimates\nthe minimum wage price effect using monthly Brazilian household and firm data from 1982 to\n2000 aggregated at a regional level. Empirical evidence on price effects will help to answer\nthe question of who pays for the higher costs: firms, consumers or the unemployed. The\nanswer to this question is a contribution to the controversial recent debate in the literature\nover the direction of the minimum wage employment effect. Employment might not be\naffected if firms are able to pass through to prices the higher labour costs associated to a\nminimum wage increase. In that case, consumers pay for the increase. Furthermore, if the\npoor consumers are those buying minimum wage labour intensive goods, or if these goods\nrepresent a large proportion of their consumption bundle, then minimum wage increases\nmight hurt rather than aid the poor. Moreover, if minimum wage increases cause inflation,\nthey will hurt the poor further, who disproportionately suffer from it. Robust results indicate\nthat the minimum wage raises overall prices in Brazil. The resulting inflation is slightly higher\nfor the poor than for the rich in the long run, smaller in low inflation periods, and larger in\npoorer regions.