How does the minimum wage affect earnings inequality in countries with a large informal sector? This paper studies this question in the Brazilian context throughout the 2000s. Using household survey data, I show that, differently from the formal sector, informal earnings inequality did not fall alongside the rapid expansion of the minimum wage. Moreover, I provide reduced-form evidence that the minimum wage increased overall inequality due to its strong inequality-increasing effects on the informal sector. I then develop a stylized model where heterogeneous firms compete for labor and select into informality. I investigate when and how raising the minimum wage can increase overall inequality and reduce worker welfare. I extend the model to incorporate worker heterogeneity, and calibrate the quantitative framework using Brazilian data. The main counterfactual shows that, by generating substantial amounts of informality, the increase in the minimum wage is responsible for a 6.4% increase in aggregate inequality. My analysis also highlights that the estimated increase in formal enforcement does little to prevent the inequality-increasing effects of the minimum wage. Lastly, I show that improvements in the skill composition reduced informality by 41%, and that the skill-biased technical change increased inequality by 26%. These results suggest that movements into and out of the informal sector modulate the effects of formal labor legislation.
In many countries, the regulations governing public and private pension systems, hiring procedures, and job contracts differ. Public sector employees tend to have longer tenures and higher wages compared to workers in the private sector. As such, social security reforms can affect both retirement decisions and sectoral choices. We study the effects of social security reforms on retirement and sectoral behavior in an economy with multiple pension systems. We develop a life-cycle model with three sectors - private formal, private informal and public - and endogenous retirement. In a model calibrated to Brazil, we quantitatively assess the long-run effects of reforms being discussed and implemented across countries. Among them, we study the unification of pension systems and increasing the minimum retirement age. We find that these reforms affect the decision to apply to a public job, the profile of savings over the life cycle, and informality. In the long run, these reforms lead to higher output and capital, reduced informality, and average welfare gains. They also drastically reduce the social security deficit.
We investigate the impact of trade shocks on the labor allocation within industries at the local labor market level. Using the Brazilian import liberalization of the 1990s as the empirical setting, we uncover a novel margin for impact of trade: industrial reorganization among non-traded producers. We begin by showing empirically that local labor markets more exposed to the policy experienced more job reallocation across firms within traded and non-traded industries compared to those less exposed. Moreover, small establishments were less likely to survive compared to large establishments; among survivors, they were less likely to grow. To explain these empirical regularities, we provide reduced-form evidence that non-traded producers select into importing: plants in high exposure regions were more likely to start importing, with new importers originating from the middle of the size distribution but growing the most over the liberalization period. Motivated by these findings, we develop a parsimonious model of heterogeneous producers incorporating this mechanism. The theory is consistent with the empirical findings, and implies that reallocation among non-traded producers is welfare-enhancing. In contrast, in a special case where all non-traded producers make the same importing decision, this reallocation effect disappears. To evaluate the welfare effects of our findings, we extend the model to a quantifiable framework which we discipline with our empirical estimates.