Political Variables as Instruments for the Minimum Wage

Following the early 1980s apparent consensus, there has been a controversial debate in the literature over the direction of the minimum wage employment effect. Explanations to nonnegative effects range from theoretical to empirical identification and data issues. An explanation, however, that has not been sufficiently explored is that a non-negative effect might be an upward biased estimate of a truly negative effect, resulting from the simultaneous determination of the minimum wage and employment. This paper estimates the employment effect of the minimum wage using a number of political variables – not previously used in the literature – as excluded exogenous instruments to control for the endogeneity of the minimum wage variable. The data used is an under-explored Brazilian monthly household survey from 1982 to 2000. Robust results indicate that an increase in the minimum wage has very small adverse effects on employment.