Minimum wage hikes and Employment Transitions in Brazil1

This paper investigates the effect of the minimum wage on employment transitions in Brazil and, in particular, on the informal sector transitions. We estimate the probability of becoming nonemployed (unemployed or out of the labour force) and the probability of moving to the informal sector after minimum wage hikes. We estimate these effects separately for periods with high and low inflation to assess how agents react to minimum wage hikes under different inflationary expectations, particularly, under different degrees of wage indexation. Workers affected by minimum wage increases are compared with similar workers further up in the wage distribution. In order to account for heterogeneity between the treated minimum wage workers and the comparison groups we use a difference-in-differences approach that compares treated and comparison groups in periods with nominal increase in the minimum wage with periods with no increase. In this last case the comparison and treated groups are defined as if there had been an increase in the minimum wage (pseudo-experiment). Such strategy is applied in a parametric way via probit estimates and also in a nonparametric way using kernel propensity score matching method. Our findings suggested that disemploymet effects were more likely to be observed in the late 1990´s than in the early 1980´s. This negative effect affects in 1990 affects both informal and formal workers, but it is not a characteristic of all minimum wage hike episodes. We also find no robust evidence that minimum wage hikes lead to transitions from the formal to the informal sector