Do Minimum Wage Price Effects Hurt the Poor More?,

Whether, and to what extent, minimum wage legislation helps the poor is a crucial question for policymakers. Recent academic empirical work has sparked a heated debate with two clear sides: those who find evidence of adverse employment effects -in line with the standard theoretical prediction and those who fail to find such evidence (Freeman, 1996; Brown, 1999). If firms do not respond to minimum wage increases by reducing production and employment, they might respond by raising prices. Theory predicts that an industry wide cost shock, such as a minimum wage increase, is passed on to prices. A small, but growing, empirical literature has examined such price effects of minimum wages (Brown, 1999). However, this evidence is primarily focused on the relatively small US food sector, which employs a disproportionately large share of minimum wage workers. The main finding of small overall and sectoral price effects in the US (Card and Krueger, 1995) is thus perhaps not too surprising. It is far from clear whether such findings could be generalized to developing country contexts, where poverty is more extensive and minimum wages influence a larger proportion of the workforce. In this paper we estimate the minimum wage price effects in Brazil, using monthly household and firm data over nearly two decades. We thus provide, to the best of our knowledge, the first empirical evidence on the price effects of minimum wages in a key developing country. In Brazil, minimum wage