Anticipated effects of the minimum wage on prices

Abstract

There is little empirical evidence on the effect of minimum wage increases on prices, particularly for developing countries. This paper provides estimates of this effect using monthly Brazilian household and firm data over 18 years. As minimum wage increases in Brazil sare large and frequent, they have a potentially important impact on aggregate prices. Rational agents, in anticipation of such price effects, may take minimum wage increases as a signal for future price and wage bargains. We find that the minimum wage raises overall prices not only on the month of the increase, but also in the two months prior to the change as well as after the change.

Acknowledgements

Special thanks to Alan Krueger, Charles Brown, Chin Lee, Christian Dustmann, Costas Meghir, Daniel Hamermesh, David Wittenburg, Gianni De Fraja, Kenneth Couch, Mathew Slaughter, Michael Baker, Penny Goldberg, Stephen Nickell, Steve Wheatley Price and Walter Wessels. Thanks to Lucio Sarno as editor and two anonymous referees. And thanks to comments of various discussants and participants in the following conferences: SOLE-America, ESPE-Spain, EEA-Italy, LAMES-Brazil, LACEA-Spain, RES-England, SBE-Brazil and LACEA-Mexico.

Notes

¹ Data for all industries was not available to calculate productivity, but the productivity in the metallurgic industry is taken as a proxy to overall productivity, as this is one of the most important industries in the country.

² Setting price as a markup over costs assuming imperfect competition in the output market is a special case of setting price at the marginal costs under perfect competition in the output market. Card and Krueger (1995) argue that assuming perfect or imperfect competition in the output market makes little difference for the purposes of estimating the effect of an industry wide shock such as minimum wage increases on prices and employment. Incidentally, an alternative reduced form empirical price equation, assuming perfect competition in the input and output markets, can be derived from a simple general equilibrium model where price is modeled as a function of minimum wage, real interest rate, capital stock, labour supply shifters and aggregate demand shifters. The results in Section 4 were robust to this alternative specification.