The Effect of the Minimum Wage on Prices across Income Levels in Brazil

With small employment responses becoming prevalent in the literature, the minimum wage is just a program that transfers money from one group to another. If the poor are the consumers of minimum wage labour intensive goods, or if these goods represent a large proportion of their consumption bundle, then minimum wage increases might hurt rather than aid the poor. Furthermore, if such increases raise overall prices, they might again hurt the poor, who disproportionately suffer from inflation. Extending the understanding of minimum wage effects on prices and in developing countries is crucial if the minimum wage is to be used as a policy to help poor people in poor countries. This paper estimates the effect of the minimum wage on prices paid by low, medium and high income consumers using monthly Brazilian household and firm data from 1982 to 2000. Robust results indicate that the minimum wage raises overall prices in Brazil. The resulting inflation is two times higher for the poor than it is for the rich in the short run and four times higher in the long run. If the poor are the consumers of minimum wage labour intensive goods, or if these goods represent a large proportion of their consumption bundle, then minimum wage increases might hurt rather than aid the poor. This paper estimates the effect of the minimum wage on prices paid by low, medium and high income consumers using monthly Brazilian household and firm data from 1982 to 2000. Robust results indicate that the minimum wage raises overall prices in Brazil. The resulting inflation is two times higher for the poor than it is for the rich in the short run and four times higher in the long run.