How Does Government Wage Policy Affect Wage Bargaining in Brazil?

Over the last thirty years, Brazil has had official wage policies, with the government determining the minimum rate of adjustment for all wages in the formal sector of the Brazilian economy. The rise in union activism after 1978 and the consequent gradual return of collective bargaining reduced the scope of influence by the government to determine the exact wage rate of the economy. Some authors viewed this phenomenon as a sign of decrease in the importance of the wage policy. In this paper, we argue instead that government wage policy remained important after the resurgence of union activism in Brazil, because it shifted the focus of discussion on the bargaining table to wage adjustment in excess of the official wage adjustment numbers. The importance of wage policy in affecting wage determination is theoretically examined by solving a right-tomanage model of wage bargaining. The innovation here is to consider the utility associated with the institutional wage as one of the components that form the union's fall-back utility level. Our main finding is that the institutional wage affects the result of the wage bargaining. We show that, in the most plausible case, a rise in the institutional wage raises the bargained wage, even though the effect is ambiguous in general. We conclude by arguing that empirical tests of the importance of wage policy in Brazil should take these theoretical considerations into account, instead of using ad-hoc models of wage determination, as had the previous empirical literature done in Brazil, which in most cases simply tested the null hypothesis of an unitary institutional wage coefficient.