Do minimum wage price effects hurt the poor more?

Abstract

Minimum wage legislation is potentially a powerful policy tool to help alleviate poverty in developing countries. This is especially the case when the detrimental employment effects are small. However, of critical importance is whether, and to what extent, minimum wage increases will generate price effects that might adversely affect the poor. This might occur, firstly, if the poor consume a lot of goods produced in sectors dominated by minimum wage workforces. Secondly, this may occur if minimum wage increases raise overall prices, as the poor disproportionately suffer from inflationary costs. In this paper we estimate minimum wage price effects for Brazil, using monthly household and firm data over nearly two decades. We find that minimum wage increases significantly raise overall prices in Brazil. Furthermore, we examine the price effect of the minimum wage separately on poor and rich consumers. The poor experience inflation rates three times higher that the latter, in the immediate aftermath of a minimum wage increase, with the differential effect diminishing over time.