To raise or not to raise the minimum wage?
Ahead of the November 6 midterm elections in the US, where the federal minimum wage is $7.25 per hour, activists from the group “Fight for $15” have been pushing candidates to follow Amazon’s recent move in raising its minimum to $15. Meanwhile, in Brazil, which is also in the middle of a national election, presidential candidates are divided on whether to freeze the country’s minimum wage, which is about $2.50.
Not just a divisive question for voters and politicians, economists, too, are split between those who see the minimum wage as a way to protect vulnerable workers from exploitation versus those who see it as discouraging firms from hiring. It’s traditionally seen as a trade-off: You can either have higher wages but less work, or more work but lower wages.
New research from Assistant Professor Christian Moser, however, suggests that workers can have their cake and eat it, too. In the working paper “Earnings Inequality and the Minimum Wage: Evidence from Brazil,” Moser and Niklas Engbom of the Federal Reserve Bank of Minneapolis find evidence that raising the minimum wage can positively benefit workers across many income levels and go a long ways toward reducing a country’s overall inequality, with little effect on employment or output.
“Rather than the minimum wage cutting a lot of jobs in Brazil, we find that it brought about a large decline in inequality,” says Moser, who is in the Economics division. “The amazing thing is that many people gained in real wages as a result of the minimum wage policy. I would not necessarily expect the same results in the US because labor markets look very different here, but I think it’s worth revisiting as opposed to just assuming that the minimum wage will cut jobs.”
Rising Tide Lifts All Boats
Moser has focused his research on Brazil because of the Latin American giant’s reputation for successfully fighting income inequality over the last two decades. From 2002 to 2014, 36 million Brazilians were lifted out of extreme poverty, thanks both to new social insurance programs as well as to a steady increase in the real minimum wage, which rose by 119 percent from 1996 to 2012 after adjusting for inflation. (In the US, meanwhile, the real minimum wage today is less than at any time since the 1960s, while inequality has also increased substantially over the past 30 years.)
To uncover the effects of the minimum wage increase in Brazil, Moser did a deep dive into the country’s historical labor data. He took a Portuguese language class and made 12 trips to Rio de
Janeiro, spending several months inside a high-security data room at the Brazilian Institute of Geography and Statistics (IBGE) to process digitalized records of over one billion employment spells over the period of 1988 to 2012.
With hundreds of gigabits in data files, Moser used statistical programs and code to trace the income for every registered worker in Brazil over the past 25 years. He focused on the years after 1995, once a turbulent period of hyperinflation had ended and a new government led by Fernando Henrique Cardoso pushed for a rapid increase in the legal wage floor.
The research results indicate a solid correlation between the country’s minimum wage hikes and a decline in earnings inequality. According to the findings, by increasing the minimum wage, 80 percent of all workers in Brazil’s labor sector felt a positive boost, even though fewer than 5 percent of workers nationally earned the minimum wage in any given year. Moreover, there were mild negative effects on the labor force participation rate, employment rate, and the formal sector employment share.
“In a competitive market, a binding wage floor will cut off people from employment because markets can’t clear,” says Moser. “We find something far from that. As the minimum wage increased in Brazil, not only did people at the bottom stay employed but they also increased their wages. Furthermore, as the minimum wage puts pressure at the very bottom of the income distribution, some of the workers earning above the minimum wage also see their wages bid up by competition.”
Mixed Evidence in US
Whether other countries could see similar benefits from a minimum wage hike is a heated debate. A new study from Berkeley’s Center on Wage and Employment Dynamics found that in the first six major US cities to raise their minimum wage above $10 an hour, workers’ earnings went up while job growth held steady or improved. However, another recent study from New York University found that a higher minimum wage reduces hiring and causes large reductions in hours-worked.
Moreover, it’s unclear if Brazil would have experienced the same benefits from raising its minimum wage had the country not concurrently experienced incredible economic growth. Since 2012, Brazil has gone through a political crisis and economic contraction, shedding millions of jobs and losing ground in the fight against inequality. Unemployment has risen to around 13 percent. According to a recent report, six Brazilian billionaires hold as much wealth as their poorest 100 million compatriots combined.
These setbacks have many Brazilians longing for the days when wages were rising and inequality was falling. The left-leaning Workers Party (PT), which took credit for raising tens of millions of Brazilians into the middle class when it was in power from 2002 to 2016, is counting on those voters to show their appreciation in a run-off presidential election on October 28. The PT’s presidential candidate leads among people who earn close to the minimum wage, while a right-wing populist named Jair Bolsonaro, who is seen as more likely to freeze the minimum wage, leads among Brazilians earning more than 10 times the minimum wage.
“People long for the times of high growth when the minimum wage was a great policy, even if it may not be such a great policy under today’s circumstances,” says Moser.
To that point, Moser said he is now gathering additional wage and employment data from 2012 to 2017 in Brazil for a follow-up study. He is also looking to do similar analyses in other countries, trying to better understand the conditions under which a minimum wage can be an effective tool to fight income inequality without disrupting the economy.
Read the research
About the researcher
Christian is an Assistant Professor within the Finance and Economics Division at Columbia Business School. His research focuses on macroeconomics and labor economics...Read more.