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

• Author: Roxana MAURIZIO,Gustavo VÁZQUEZ
• Published date: 01 March 2016
• Date: 01 March 2016
• DOI: http://doi.org/10.1111/ilr.12007

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,