published as: 'Anticipated Effects of the Minimum Wage on Prices' in: Applied Economics, 2006, 38(3), 325-337.
There is very little empirical evidence on the effects of the minimum wage on prices in the
international literature and none whatsoever for developing countries. This paper estimates
the minimum wage price effect using monthly Brazilian household and firm data from 1982 to
2000 aggregated at a regional level. Empirical evidence on price effects will help to answer
the question of who pays for the higher costs: firms, consumers or the unemployed. The
answer to this question is a contribution to the controversial recent debate in the literature
over the direction of the minimum wage employment effect. Employment might not be
affected if firms are able to pass through to prices the higher labour costs associated to a
minimum wage increase. In that case, consumers pay for the increase. Furthermore, if the
poor consumers are those buying minimum wage labour intensive goods, or if these goods
represent a large proportion of their consumption bundle, then minimum wage increases
might hurt rather than aid the poor. Moreover, if minimum wage increases cause inflation,
they will hurt the poor further, who disproportionately suffer from it. Robust results indicate
that the minimum wage raises overall prices in Brazil. The resulting inflation is slightly higher
for the poor than for the rich in the long run, smaller in low inflation periods, and larger in
poorer regions.
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