DP16143 Earnings Inequality and the Minimum Wage: Evidence from Brazil

Author(s): Niklas Engbom, Christian Moser
Publication Date: May 2021
Keyword(s): Brazil, employment, Equilibrium Search Model, Inequality, minimum wage, monopsony, reallocation, spillover effects, Wage distribution, Worker and Firm Heterogeneity
JEL(s): E24, E25, E61, E64, J31, J38
Programme Areas: Labour Economics, Public Economics, Development Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16143

We show that a rise in the minimum wage accounts for a large decline in earnings inequality in Brazil since 1994. To this end, we combine rich administrative and survey data with an equilibrium model of the Brazilian labor market. Our results imply that the minimum wage has far-reaching spillover effects on wages higher up in the distribution, accounting for one-third of the 25.9 log point fall in the variance of log earnings in Brazil since 1994. At the same time, the minimum wage's effects on employment and output are muted by reallocation of workers toward more productive firms.