Working Papers

How do minimum wages affect earnings inequality in countries with large informal sectors? I provide reduced-form evidence that the 2000s minimum wage hike in Brazil raised overall inequality by increasing inequality inside the informal sector. I develop a model where heterogeneous firms select into informality to investigate when and how raising the minimum wage can increase inequality. I calibrate the model to Brazil and find that, by generating substantial informality, the increase in the minimum wage raised overall inequality by 6.4%. 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.

Policy Work