Earnings Inequality and the Minimum Wage: Evidence from Brazil

Abstract

Increases in the minimum wage can substantially reduce earnings inequality. To demonstrate this, we combine administrative and survey data with an equilibrium model of the Brazilian labor market. We find that a 128 percent increase in the real minimum wage in Brazil between 1996 and 2018 had far-reaching spillover effects on wages higher up in the distribution. The increased minimum wage accounts for 45 percent of a large fall in earnings inequality over this period. At the same time, the effects of the minimum wage on employment and output are muted by reallocation of workers toward more productive firms.. (JEL D31, E23, E24, J31, J38, O15)

Inequality, income dynamics, and worker transitions: The case of Mexico

“…It is, however, noteworthy to observe that this correlation can be observed through P25, suggesting that increases in the minimum wage may have spillover effects on wages higher up in the earnings distribution. This result, known in the literature as the "lighthouse effect," echoes the findings of Engbom and Moser (2021) for Brazil and Kaplan and Pérez-Arce Novaro (2006) and Campos Vázquez and Rodas Milián (2020) for Mexico. The increase in earnings in low percentiles that are not directly affected by the minimum wage may also relate to increases in labor productivity after 2013.…”

Earnings inequality and dynamics in the presence of informality: The case of Brazil

“…RAIS is very large, with an average of around 40 million observations per year, which sums to approximately 1.2 billion job records for the 1985–2018 period. For the year 1996, this corresponds to around 42.5% of the labor force, 46.0% of employment, and close to all formal employment (Engbom and Moser (forthcoming)).…”

“…The fall in inequality is significant in both sectors, although somewhat more pronounced for the formal sector when looking at the P90–10 log percentile ratio. A possible explanation for this is that the rapid increase in Brazil's minimum wage over this period has contributed to a disproportionate reduction in inequality in the formal sector, where it is enforced (Engbom and Moser (forthcoming)). Again, these patterns are qualitatively similar across log earnings (panel A) and residual log earnings (panel B).…”

“…We also contribute to a growing literature on the causes of the pronounced decrease in earnings inequality in Brazil since the mid‐1990s. Firpo and Portella (2019) provide an excellent review of recent studies that quantify the importance of falling returns to education and experience (Ferreira, Firpo, and Messina (2017)), falling returns to firm productivity (Alvarez et al (2018)), trade liberalization (Gonzaga, Filho, and Terra (2006), Ferreira, Leite, and Wai‐Poi (2007), Dix‐Carneiro and Kovak (2015)), and the rapid rise of the minimum wage (Engbom and Moser (forthcoming))—among other factors—toward this decrease in earnings inequality 3…”

“…55 Engbom and Moser (forthcoming) and Haanwinckel (2020) show that the rise of the minimum wage had a pronounced effect on the earnings distribution over this period. …”