The impact on inequality of raising the minimum wage: Gap- narrowing and reranking effects.

Raising the minimum wage may reduce inequality by increasing the wages of low-skill workers, but it may also increase inequality due to negative impacts on employment that produce wage losses. Using estimates of the elasticities of wages and employment to changes in the minimum wage in Colombia and Brazil, we show that the net impact on inequality of increasing the minimum wage may depend on the distributional weights used for inequality measurement. The results are obtained by decomposing the Gini index into reranking and gap-narrowing Effects. Inequality increasing reranking effects, which are associated to job losses, may dominate inequality decreasing gap-narrowing effects, which are associated with wage gains, when high weights are placed on workers with low earnings. For standard distributional weights however, the net impact is a reduction in wage inequality.