Wage Inequality Changes in Brazil: Market Forces, Macroeconomic Instability and Labor Market Institutions (1981-1997)

Abstract

In this paper, I examine the sources of wage inequality changes among prime age male workers in Brazil during the 1980's and 1990's. Inequality increased in the 1980's and decreased in the 1990's. I begin by decomposing these changes into three effects. First, the effect due to changes in the skill distribution of the workers; second, the effect due to changes in skill prices and premiums; and third, the residual effect which is interpreted as due to changes in the distribution of unobservable skills and their prices. I find that most of the sources of these changes are due to changes in (i) the unabservable skill prices and (ii) the observable skill prices associated to industry, occupation and occupation status. After showing that these changes in skill prices are not consistent with the changes in the supply of and demand for labor during these periods, I examine the possibility that the minimum wage policy and the macreconomic instability of the period can explain these changes. I find that inflation is strongly associated with inequality mainly due to its unanticipated component. This may be interpreted as indirect evidence that the indexation system adopted in Brazil during the high-inflation years may be a mechanism through which inflation affected wage inequality.