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

Author

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  • Sara Lemos

Abstract

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.

Suggested Citation

  • Sara Lemos, 2004. "The Effect of the Minimum Wage on Prices across Income Levels in Brazil," Discussion Papers in Economics 04/22, Division of Economics, School of Business, University of Leicester.
  • Handle: RePEc:lec:leecon:04/22
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp04-22.pdf
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    Citations

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    Cited by:

    1. Belser, Patrick. & Rani, Uma., 2010. "Extending the coverage of minimum wages in India : simulations from household data," ILO Working Papers 994584553402676, International Labour Organization.
    2. Lasso-Valderrama, Francisco Javier & López-Enciso, Enrique Antonio, 2011. "Incrementos del salario mínimo legal : ¿Cuál es el impacto redistributivo del cambio en los precios relativos al consumidor?," Chapters, in: López Enciso, Enrique & Ramírez Giraldo, María Teresa (ed.), Formación de precios y salarios en Colombia T.2, volume 2, chapter 20, pages 840-869, Banco de la Republica de Colombia.
    3. Pablo Blanchard & Paula Carrasco & Rodrigo Ceni & Cecilia Parada & Sofía Santín, 2021. "Distributive and displacement effects of a coordinated wage bargaining scheme," Documentos de Trabajo (working papers) 21-26, Instituto de Economia - IECON.
    4. Francisco Lasso-Valderrama & Laura Rodríguez-Quintero, 2018. "Ciclo y composición del cambio en los salarios: una aproximación a la estructura salarial de Colombia," Borradores de Economia 1057, Banco de la Republica de Colombia.
    5. Hoxha Adriatik, 2010. "Causal relationship between prices and wages: VECM analysis for Germany," EuroEconomica, Danubius University of Galati, issue 26, pages 90-106, November.
    6. M. A. Ivanova, 2016. "Analysis of the nature of cause-and-effect relationship between inflation and wage in Russia," Studies on Russian Economic Development, Springer, vol. 27(5), pages 575-584, September.
    7. Gligor Bishev & Tatjana Boshkov, 2015. "Arguments for and Against Retaining Exchange Rate Regime: An Empirical Analysis for Republic of Macedonia," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(8), pages 1004-1013, August.

    More about this item

    Keywords

    minimum wage; labour costs; price effect; cost shock; Brazil;
    All these keywords.

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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