Authors assess the extent to which a rise in the minimum wage can account for 3 facts characterizing a large decline in earnings inequality in Brazil from 1996–2012:
- The decline is more pronounced towards the 1 bottom of the distribution;
- One quarter of the decline stems from an increase in relative pay at less productive firms; and
- 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. Authors 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.
Results suggest that labour market dynamics can lead to large effects of policy on earnings inequality.
This research was funded under the Private Enterprise Development in Low-Income Countries (PEDL) Programme
Engbom, N., Moser, C. Earnings Inequality and the Minimum Wage: Evidence from Brazil. (2016) 77 pp