THE IMPACT OF MINIMUM WAGE CHANGES ON EMPLOYMENT AND WAGES IN BRAZIL: Evidence from Time Series and Longitudinal Data

The impact of minimum wages on the labour market has been a recurrent issue in the theoretical and empirical literature [e.g., Cubitt and Heap (1999), Dickens et al. (1998), Waltman et al. (1998), and Dolado et al. (1996)]. There are two clear and divergent views on the normative impact of minimum wages on labour markets in developing economies. The advocate view holds that minimum wages redistribute resources in a welfare enhancing way, and as such have the potential to reduce poverty, enhance productivity, and foster economic growth. The distortionist view suggests that minimum wage interventions misallocate labour, waste resources through rent-seeking, impair adjustment to economic shocks, deter investment and reduce growth rates with the effect of depressing wages where most of the poor are found – i.e., in the urban informal sector and in the rural sector [Freeman (1994)]. In this paper, we present estimates on the impact of the minimum wage on the Brazilian labour markets using time series data for the period between 1982 to 1999, and longitudinal information on households for the period 1995-99. The results suggest a robust and negative impact of the minimum wage on formal employment and a sizeable impact on the distribution of wages