Distribution effects of the minimum wage in four Latin American countries: Argentina, Brazil, Chile and Uruguay

AuthorRoxana MAURIZIO, Gustavo VÁZQUEZ
Publication Date01 Mar 2016
International Labour Review, Vol. 155 (2016), No. 1
Copyright © The authors 2016
Journal compilation and translation © International Labour Organization 2016
Distribution effects of the minimum
wage in four Latin American countries:
Argentina, Brazil, Chile and Uruguay
Roxana MAURIZIO* and Gustavo VÁZQUEZ**
Abstract. This article provides a comparative analysis of the distribution effects of
the increase in the real value of the minimum wage in Latin America during the
200 0s in four Latin American countries: Argentina, Brazil, Chile and Uruguay.
Using semiparametric techniques to estimate counterfactual density functions, the
authors nd that the increase in the minimum wage had an equalizing effect in
Argentina, Brazil and Uruguay, but not in Chile. This increase accounted for a
considerable part of the decline in wage inequality, which was the result of com-
pression at the lower tail of the wage distribution.
During the 2000 s, the purchasing power of the minimum wage increased
in both developed and developing countries – a process that helped
strengthen the role of the minimum wage as a wage policy instrument (ILO,
2009). In Latin America, this positive trend was observed in several countries
with varying degrees of intensity, representing a considerable improvement on
the situation in the 1990s. At the same time, many Latin American countries
saw a decline in wage inequality.
The aim of this article is to identify whether – and to what extent – the
minimum wage policy implemented during the approximate period 2000 –121
contributed to the decline in wage inequality in Argentina, Brazil and Uruguay,
where there was a substantial increase in the real value of the minimum wage,
and in Chile, where the increase was less marked. These differences, together
* Universidad Nacional de General Sarmiento and CONICET (National Scientic and
Technical Research Council), Argentina, email: roxanadmaurizio@gmail.com. ** Universidad
Nacional de General Sarmiento, Argentina, email: gmvazque@ungs.edu.ar.
Responsibility for opinions expressed in signed articles rests solely with their authors, and
publication does not constitute an endorsement by the ILO.
1 The period analysed is, broadly speaking, the rst decade of the 2000s, since this period
saw the strongest rise in the minimum wage, as well as a marked decline in wage inequality in these
countries. However, the exact years considered for each country depend on the availability of in-
formation and the time at which they started to see these positive trends. Specically, the years
studied, for each country, were: 20 03–12 (Argentina); 200 3–11 (Brazil); 2000 –11 (Chile); and
2004 –12 (Uruguay).
International Labour Review98
with the fact that these countries have dissimilar occupational structures, make
for a particularly rich analysis.
This article is also of interest for three further reasons. First, there are
diverging theoretical arguments regarding the impact of the minimum wage
on the labour market, which calls for empirical studies to be carried out to
determine which of the different theories is valid in specic contexts. Second,
empirical studies carried out on Latin American economies, using a variety
of estimation methodologies and indicators, have yielded very mixed results.
Therefore, a comparative study of different cases, based on the same method-
ology, should provide more useful guidance on the effects of minimum wage
policies. Third, most of the studies on the region focus on the role of returns
to education in the dynamics of wage distribution, both in the 1990s and sub-
sequently, placing little emphasis on labour institutions. However, given the
strong rise in the minimum wage during the 2000s, one might imagine that
this would also have an effect on wage inequality. Moreover, it is possible that
not only the minimum wage but also other labour institutions and regulations
affected the returns to different individual attributes, including human capital.
For this reason, in-depth analysis of the minimum wage is a valuable comple-
ment to existing wage distribution studies for Latin America.
To estimate the effect of an increase in the real value of the minimum
wage on wage inequality in 2000 –12 for the four countries studied, we use the
methodology proposed by DiNardo, Fortin and Lemieux (1996). These authors
use a semiparametric method for estimating counterfactual density functions
to assess how the wage distribution would have been in 1988 if, keeping indi-
vidual attributes constant, the real minimum wage had been that prevailing in
1979, which was 27 per cent higher.
The results obtained in this article suggest that the increase in the value
of the real minimum wage had an equalizing effect in Argentina, Brazil and
Uruguay, while in Chile the effects were not signicant. As expected, in the
rst three countries, the decline in wage inequality was associated exclusively
with greater wage compression at the lower tail of the distribution.
We should point out some limitations relating to the methodology used
and hence the results obtained. First, our study ignores the potential negative
effects that an increase in the minimum wage can have on employment
levels. As Bosch and Manacorda (2010) state, it is not possible to distinguish
between a truncation effect on the wage distribution, i.e. the loss of jobs pay-
ing wages below the minimum as a result of a higher minimum wage, and a
censoring effect, whereby the minimum wage causes the wages of those initially
making less than the minimum to rise to exactly the level of the wage oor.
However, although a priori we should not ignore these potential employ-
ment effects, it is important to note that the period under review was charac-
terized by high job growth in the countries studied (Maurizio, 2015; Perazzo,
2012; Beccaria and Maurizio, 2012; Amarante, Colafranceschi and Vigorito,
2014). This was particularly true in Argentina, Brazil and Uruguay, and was
accompanied by a strong process of labour formalization (Amarante and Arim,
Distribution effects of the minimum wage in Latin America 99
2015; Berg, 2010; Bertranou, Casanova and Sarabia, 2013; Maurizio, 2015; Tor-
narolli et al., 2014; Weller and Roethlisberger, 2011). The combination of a
sustained increase in aggregate employment, particularly formal employment,
and a dynamic rise in the minimum wage would suggest that the minimum
wage increase did not have any signicant negative effects on these variables.
The second limitation is that our methodology entails partial equilib-
rium exercises, which could be considered a short-term approach; therefore,
certain additional effects are excluded. For example, we do not consider here
the effect that changes in the value of the minimum wage could have on con-
sumption (and, in turn, on aggregate demand and employment), especially in
those cases where the population directly affected by the minimum wage has
a high propensity to consume. Nor do we take into account the possible ef-
fects of the minimum wage on labour participation decisions or on the labour
supply qualications structure, nor the effects on the behaviour of wage gaps.
This article focuses exclusively on the direct distribution effects of the
minimum wage, without measuring the net effects, or the short- or long-term
effects, that this labour institution might have had on other relevant aspects
in these four Latin American countries. This, however, is an area on which fu-
ture analysis could usefully focus.
The remainder of the article is organized into seven sections. The rst
presents a review of the main theoretical approaches and empirical literature
concerning the effect of the minimum wage on the labour market. The sec-
ond section provides details of our data sources, and the third describes the
estimation methodology used to assess the distribution effects of the min-
imum wage. The fourth section describes the evolution of the minimum wage
and of wage inequality, and explores the relationship between the two. The
fth section presents the econometric results, the sixth describes the sensitiv-
ity analysis carried out to verify the robustness of our results, and the last sec-
tion presents our conclusions.
Theoretical approaches and empirical literature
Theoretical approaches: The effects of the minimum wage
One of the most controversial aspects of the minimum wage concerns the ef-
fect it can have on employment demand. According to the standard model
of perfect labour market competition, xing the minimum wage above the
equilibrium wage will result in reduced employment, adversely affecting those
workers to whom the minimum wage applies. The extent of the reduction in
employment will depend positively on the price elasticity of demand.
However, alternative conceptual frameworks exist, such as monopsonistic
market models or the efciency wage theory, which present the relationship
between labour institutions and their effects on the labour market in a dif-
ferent way. Specically, under the monopsonistic market model, wages arising
from the balance between employment supply and demand are below marginal
labour productivity; an increase in the value of the minimum wage does not,

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