How is the Minimum Wage Shaping the Wage Disitribution: Bite, Spillovers, and Wage Inequality

Over the last three decades, wage inequality and the importance of the minimum wage presented an interesting negative correlation in Portugal. Using a semiparametric approach, counterfactual decomposition methods, and an extremely rich matched employer-employee dataset of all employees in the country, this paper presents significant visual and quantitative evidence of how the minimum wage structurally reshaped the wage distribution. The remarkable rise in the real minimum wage of 2006-2019 fully explained the sharp decline in wage inequality, and 40% of average wage growth - for women, who benefited the most, that was 60%. Spillover effects reached up to 40% above the minimum, being at times more important than the bite itself. The minimum wage reduced within and between wage in- equality in several fronts, cutting the gender wage gap by a quarter, potentially decreasing the returns to education, and raising wages of workers at less productive firms. While the minimum wage bite was felt in workers’ base wages, spillovers predominantly manifested in total wages.