Monday, February 18, 2013

Minimum Wage and Unemployment: The Brazilian Experience

The State of the Union address last week raised the possibility of increasing the minimum wage, and a debate on the effects of this ensued. Krugman, among others, has quite correctly pointed out that there is no evidence for positive effects of a higher minimum wage on the rate of unemployment. In other words, a higher minimum wage should not lead to a higher level of unemployment. The classic paper on the subject was written long ago by Card and Krueger.

Below I show the recent evidence (2003-2012) on the relation between minimum wage and unemployment rate in Brazil. As it can be seen, minimum wages almost doubled in real terms (left axis; black line), while unemployment (right axis; grey line), in this case for the Metropolitan area of São Paulo, dropped dramatically (source IPEA Data).
In the Brazilian case, in which median income has not grown too much, the increase in the minimum wage, together with the expansion of the Bolsa Familia, has been one of the reasons behind the improvement in income distribution during the Workers' Party administrations. This suggests that a higher minimum wage is also an instrument for better income distribution. So it seems that the evidence for an expansion of the minimum wage is quite strong, not just in the US.

PS: Note that this does not mean that a higher minimum wage solves all the problems, or that in the case of Brazil the doubling of its value has led to a marked improvement in income distribution. At this point, as shown below, the real minimum wage is at the same real level that it was during the late 1960s to early 1980s period.
Historically, the highest levels of the real minimum wage in Brazil were in the second Vargas and the Juscelino Kubitschek administrations, even though higher inflation implied that the real value was more volatile (also, growth was back then more or less double the average rate of growth of the last decade).

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