Minimum Wage, “Lighthouse Effect” and Poverty

Abstract

This paper evaluates the effectiveness of the minimum wage policy in various segments of Brazilian labor markets. Our basic technique is to quantify corner solutions imposed by the minimum wage. These points are later used as a focalization mechanism in the simulation of upper bounds of the effects of the minimum wage on poverty measures. We highlight the importance of two unusual effects of the minimum wage, i) The high percentage of informal employees receiving exactly one minimum wage, this enhances the effects of the minimum on poverty, and ii) The use of the minimum wage as a numeraire in wage determination, in particular within the formal sector.

JEL Classification: J31; J38.