The effect of the minimum wage on wages, employment and prices in Brazil

The international literature on minimum wage greatly lacks empirical evidence from developing countries. Brazil's minimum wage policy is a distinctive and central feature of the Brazilian economy. Not only are increases in the minimum wage large and frequent but also the minimum wage has been used as anti-inflation policy in addition to its social role. This study estimates the effects of the minimum wage on wages, employment and prices using panel data techniques and monthly household data from 1982 to 2000 at individual and regional levels. A number of conceptual and identification questions is discussed. (1) Various strategies on how best to measure the effect of a constant (national) minimum wage are summarized in a "menu" of minimum wage variables and used to estimate wage, employment and price effects. (2) The superiority of "spike" over "fraction affected" and "Kaitz index" as a minimum wage variable is established. (3) An employment decomposition that separately estimates the effect of the minimum wage on hours worked and on the number of jobs is used. (4) Political variables are used as excluded exogenous instruments for the minimum wage variable in employment models. (5) The question of who pays for the higher costs associated to a minimum wage increase - firms, consumers, or the unemployed - is addressed. This is important because employment might not be affected if firms are able to pass the higher costs through to prices. (6) The minimum wage effects are estimated across regions, in high and low inflation periods, across formal and informal sectors, across public and private sectors, and across income levels. Robust results indicate that an increase in the minimum wage strongly compresses the wages distribution, has moderately small adverse effects on employment, and raises overall prices in Brazil. This evidence is consistent with a rapid wage-price spiral and an inelastic labour demand curve. On the one hand, an increase in the minimum wage compresses the wages distribution, but this effect vanishes away because of the wage-price spiral that follows. On the other hand, employment adverse effects are small because firms anticipate the spiral and do not adjust employment to avoid incurring adjustment costs. In other words, the minimum wage temporarily increases the wages of low paid workers, does not destroy too many and causes some price inflation in Brazil. The compression effect is stronger in poorer regions and under high inflation, and equally strong in the formal and informal sectors. The total employment appears to be dominated by the hours rather than the jobs effects. Some evidence was found suggesting that the minimum wage provoke more disemployment in poorer regions and under low inflation; it provokes about the same amount of disemployment in both the formal and informal sectors. The inflation provoked by the minimum wage is the same for the poor and the rich, smaller under low inflation periods and larger in poorer regions.