Does an Increasing Minimum Wage Reduce Formal Sector Employment? Evidence from Brazil

Between 2003 and 2012, Brazil’s real minimum wage increased by 62%. In this paper, we take advantage of matched employer-employee data and examine whether this increase resulted in negative impacts in the formal labor market. The empirical analysis is carried out at the local level. Our main identification strategy relies on geographical variation in the incidence of the minimum wage. We first document substantial heterogeneity in the incidence both across and within regions. We find limited overall disemployment effects but unravel larger negative employment elasticities for groups and sectors more exposed to minimum wage increases. We complement our analysis by exploiting the introduction of regional wage floors in five states directly targeting workers in the restaurant and accommodation industry. Across different empirical strategies, we show that wage floors successfully raised salaries at the bottom of the wage distribution. However, in this case, we fail to find significant impacts on employment outcomes.