The Role of the Minimum Wage on the Declining Wage Inequality in Latin America: Evidence from Brazil

After a period of hyperinflation and the adoption of the Brazilian Real in 1994, Brazil has experienced a significant decline in income inequality along with a rapid recovery of the real minimum wage. There is no empirical consensus on whether the increase in the minimum wage contributed to the declining inequality because of disagreements about its potential adverse effects on employment. I document the effectiveness of the minimum wage on compressing wage inequality throughout the wage distribution and its effects on employment by using Brazilian regional data from 1995 to 2015. A counterfactual exercise shows that 35 percent of the decline in lower-tail inequality among all workers is attributable to the increase in the minimum wage and this effect is as large as 50 percent when only formal employees are considered. There is evidence of potential spillover effects of the minimum wage; however, its effects on upper-tail inequality are negligible. Finally, I find small but significant adverse effects of the minimum wage on formal employment.