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Earnings Inequality and the Minimum Wage: Evidence from Brazil

Author

Listed:
  • Christian Moser

    (Princeton University)

  • Niklas Engbom

    (Princeton University)

Abstract

We assess the extent to which a rise in the minimum wage can account for three facts characterizing a large decline in earnings inequality in Brazil from 1996–2012: (i) the decline is more pronounced towards the bottom of the distribution; (ii) one quarter of the decline stems from an increase in relative pay at less productive firms; and (iii) another quarter is attributable to falling pay differences due to worker heterogeneity. To this end, we build an equilibrium search model with heterogeneity in worker ability and firm productivity. The central feature of the model is the presence of spillover effects of the minimum wage on higher earnings ranks due to monopsonistic competition among firms for workers. We estimate the model using indirect inference and find that the rise in the minimum wage explains 70 percent of the decline in the variance of log earnings. Spillover effects of the minimum wage account for more than half of this decline and quantitatively match the three empirical facts. Our results suggest that labor market dynamics can lead to large effects of policy on earnings inequality.

Suggested Citation

  • Christian Moser & Niklas Engbom, 2016. "Earnings Inequality and the Minimum Wage: Evidence from Brazil," 2016 Meeting Papers 72, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:72
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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