The minimum wage and poverty and inequality in Brazil

One of the purposes of a minimum wage is to reduce poverty, by ensuring that the lowest paid workers are paid more than they would be without the minimum wage (at the cost of potentially reducing employment among low-wage workers, as I most recently noted here). The minimum wage might also reduce inequality, if it raises the income of low-income groups, while not affecting higher-income groups, and provided any disemployment effects are not too great. It is an open question how effective the minimum wage is at reducing poverty and inequality.

Most of the empirical evidence on the minimum wage comes from developed countries (and a lot of it from the US, where the federal minimum wage is very low and less likely to be binding than in other countries). So, I was interested to see this recent article by Orlando Sotomayor (University of Puerto Rico), published in the journal World Development (sorry, I don't see an ungated version), because it looks at poverty and inequality, and examines the case of Brazil. Sotomayor uses data drawn from the Monthly Employment Surveys conducted by the Brazilian Institute of Geography and Statistics, and a difference-in-differences analysis.

The choice of a difference-in-differences analysis is interesting. Although the minimum wage is specified at the national level in Brazil, differences in the income distribution will mean that the minimum wage is more binding in some states than in other states. For example, Sotomayor notes that earnings in Rio de Janeiro are lower than in São Paulo, so comparing changes in poverty (or inequality) in Rio de Janeiro with those in São Paulo after an increase in the minimum wage will provide some idea of its impact on poverty (or inequality). Sotomayor also makes use of a synthetic control method as well (which I've written about before, for example here).

Sotomayor finds that:

...within three months of a minimum wage hike, poverty and income inequality decline, on average, by 2.8% and 2.4%, respectively. Effects fade over time, particularly with respect to bottom-sensitive distribution measures, a process that is consistent with resulting job loses that fall more heavily among poorer households.

In this study, the minimum wage is associated with small improvements in poverty and inequality through raising incomes of the poor, but these improvements are reduced or eliminated by the disemployment effects in the longer run. This adds to the literature from more developed countries such as the US and suggests that, in the longer run, there may be more effective ways to reduce poverty and inequality than relying on the minimum wage. Redistribution through a more expansive social security system, or a wage subsidy for low-wage employers, are two options that deserve more consideration, as they would not be associated with the same disemployment effects as the minimum wage.