Minimum Wage Policy and Employment Effects: Evidence from Brazil
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Minimum Wage Policy and Employment Effects:
Evidence from Brazil

The aim of minimum wage increases is to change the shape of the wage distribution without destroying jobs. While it is well established in the international literature that the minimum wage compresses the wage distribution, there is no consensus on the direction and size of the effect on employment.1 This literature greatly lacks empirical evidence for Latin America. The present paper provides evidence on the minimum wage effect using a key Latin American country. I estimate the effects of the minimum wage on wages and employment using panel data techniques and monthly Brazilian household data from 1982 to 2000 at the individual and regional levels. The paper applies modern econometrics techniques to Brazilian data and extends the current understanding on the effects of minimum wages in Latin America. This paper also provides some guidance to policymaking, especially in light of the recent promises by several South American governments to increase the minimum wage.2

Minimum wage policy is a distinctive and central feature of the Brazilian economy. It has been used not only as a social policy, but also as an [End Page 219] anti-inflationary policy. For example, the minimum wage has served as an axis for coordinating the government's centralized wage policy and also as a signal for price and wage bargains.3 The minimum wage thus affects employment both directly and indirectly, through wages, pensions, benefits, inflation, and the public deficit. This confirms the importance of studying the minimum wage in Brazil. Furthermore, minimum wage increases in Brazil are large and frequent, unlike the typically small increases studied in most of the literature.4 Studying such in-creases opens the possibility of observing the negative effects predicted by standard theory and thus verifying the link between empirical data and theoretical models of the minimum wage.

This paper discusses three key conceptual and identification issues. First, it summarizes various minimum wage variables available in the literature and uses them to estimate wages and employment effects. Second, it estimates nonparametric kernel wage distributions before and after a minimum wage hike to illustrate the minimum wage compression effect; it then uses regression models to estimate the wage effect across different percentiles of the distribution. Third, it estimates the effect of the minimum wage on both hours per worker and the number of jobs, which together make up the total hours effect.

Robust results indicate that an increase in the minimum wage strongly compresses the wage distribution with small negative effects on employment in Brazil. The total effect is no more than -0.05 percent in the long run, and it appears to be dominated by the hours effect. In the short run, a 10 percent increase in the minimum wage was found to decrease total hours by no more than 0.16 percent, which decomposes into a 0.14 percent decrease in hours per worker and a 0.02 percent decrease in jobs. These last two estimates, however, are not statistically different from zero. A cautious reading is that the minimum wage does not have an adverse employment effect and to the extent it does, the effect is small. First, it is small when compared with the -1.0 percent effect in the international literature, especially considering that Brazil has larger wage effects than other countries. Second, the minimum wage affects workers primarily through the number of hours per worker, not the number of jobs; this [End Page 220] implies that any negative effects of a minimum wage are not focused where they would hurt the most—namely, through increased layoffs. The main policy implication of these results is that the minimum wage can be used as a policy against inequality without causing large job losses in Brazil.

The paper is organized as follows. The next section provides a brief literature review. The subsequent section presents the minimum wage institutional background and describes the data. The following section defines minimum wage variables and presents wage models, which motivate a discussion on identification and robustness checks. A section on employment effects opens with a decomposition of the total effects into an hours-per-worker effect and a...