What are the effects of the minimum wage on inequality in countries with large levels of informality? 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 use the setting to investigate when and how raising the minimum wage can increase overall inequality and reduce worker welfare. I extend the model to incorporate worker heterogeneity, calibrate the quantitative framework using Brazilian data, and find that by generating substantial amounts of informality, the observed increase in the minimum wage is responsible for an 11.5% increase in aggregate inequality. My analysis 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 most countries, the rules governing public and private pension systems are different, and so are hiring procedures, and job contracts. The tenures of government employees are longer and their wages, in general, higher. In this sense, social security reforms will affect not only the decision to leave the labor force, but also the choice of which sector to work. In this article, we study the impact of social security reforms on retirement and occupational behavior. We develop a life-cycle model with three sectors - private formal, private informal and public - and endogenous retirement to evaluate what are the macroeconomic and occupational impacts of social security reforms in an economy with multiple pension systems. In a model calibrated to Brazil, we simulate and quantitatively assess the long-run impact of reforms being discussed and implemented in different countries. Among them, the unification of pension systems and the increase of the minimum retirement age. These reforms are found to affect the decision to apply to a public job, savings during the life cycle and skill composition across sectors. In the long run, they lead to higher output and capital, less informality and to average welfare gains. They also drastically reduce social security deficit.
Work in Progress
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 the gains from 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 within industries, both traded and non-traded, 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 implies that reallocation among non-traded producers is welfare-enhancing. In contrast, in a special case where all non-traded producers engage in importing identically, there is no reallocation within non-traded industries.
Firm Organization and Trade Shocks: Evidence from Brazil
In this paper, I study the organization of labor within Brazilian firms. By organizing labor, firms can shape their cost function to better cope with various demand levels. I categorize workers into "layers" using occupational data, and show that firms organize labor hierarchically, hiring more workers and paying lower wages at lower layers. Firms that expand tend to add layers and stratify production. Firms that grow and do not reorganize increase wages and hours hired in all layers. However, upon reorganization, firms add a highly paid, new top layer, and reduce wages and increase hours in pre-existing layers. This result suggests that firm organization has strong implications for within firm wage inequality. Since exporters account for a large share of employment in Brazil, I examine the organization of this group of firms in particular, and verify that it follows the same hierarchical patterns. Finally, using two different instruments, I show that exports have a causal effect on firm organization, and consequently wages paid and hours hired at the layer level.