Political Variables as Instruments: Are They Good Candidates?

The international literature on minimum wage greatly lacks empirical evidence from developing countries. In Brazil, not only are increases in the minimum wage large and frequent but also the minimum wage has been used as anti-inflation policy in addition to its social role. This paper estimates the effects of the minimum wage on employment using Brazilian data. A number of conceptual and identification questions are discussed as tentative explanation of the non-negative estimates found in the literature, for example: (1) The superiority of "spike" over "fraction affected" and "Kaitz index" as a minimum wage variable; (2) Political variables as excluded exogenous instruments; (3) Decomposition of the minimum wage employment effect into hours worked and number of jobs effects. (4) Informal and public sectors sorting robustness checks. Robust results to various alternative specifications and instrumental variables indicate that an increase in the minimum wage has moderately small adverse effects on employment.