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Earnings Inequality and the Minimum Wage: Evidence from Brazil

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  • Niklas Engbom
  • Christian Moser

Abstract

We show that an increase in the minimum wage can have large effects throughout the earnings distribution, using a combination of theory and evidence. To this end, we develop an equilibrium search model featuring empirically relevant worker and firm heterogeneity. The minimum wage induces firms to adjust their equilibrium wage and vacancy policies, leading to spillovers on higher wages. We use the estimated model to evaluate the effects of a 119 percent increase in the real minimum wage in Brazil from 1996 to 2012. The policy change explains a large decline in earnings inequality, with spillovers reaching up to the 80th percentile of the earnings distribution. At the same time, employment and output fall only modestly as workers relocate to more productive firms. Using administrative linked employer-employee data and two household surveys, we find reduced-form evidence in support of the model predictions.

Suggested Citation

  • Niklas Engbom & Christian Moser, 2018. "Earnings Inequality and the Minimum Wage: Evidence from Brazil," Opportunity and Inclusive Growth Institute Working Papers 7, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmoi:0007
    DOI: 10.21034/iwp.7
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    21. repec:hal:spmain:info:hdl:2441/6ggbvnr6munghes9od0s108ro is not listed on IDEAS
    22. Benjamin Lochner & Bastian Schulz, 2016. "Labor Market Sorting in Germany," CESifo Working Paper Series 6066, CESifo.

    More about this item

    Keywords

    Worker and firm heterogeneity; Equilibrium search model; Minimum wage; Spillovers;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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