FOURTH IZA-WORLD BANK CONFERENCE ONEMPLOYMENT AND DEVELOPMENT

Bonn, May 5-6, 2009

Informality, Minimum Wages and Enforcement in Brazil

Brooke Helppie, University of MichiganKatherine Terrell, University of Michigan and IZA

Research Questions, Motivation, Contribution

To what extent is informality due to more rigid labor market regulation?

Brazil is a good case study since highly regulated and much informality

But de jure regulation may not have an effect if not enforced… Hence, we ask to what extent is informality affected by greater enforcement of labor regulations (and Minimum Wages in particular)?

Brazil - Enforcement of labor legislation varies across states

Large literature on MWs in Brazil and one new paper on enforcement (Almeida and Carneiro, 2008) but no paper there (or elsewhere) combines the two

enforcement often used as a residual explanation

Research Questions, Motivation, Contribution

Majority of MW literature identifies impact on employment in formal and informal sector without individual panel data shortcoming as measure it indirectly/net effect We ask to what extent do higher MWs and greater enforcement:

Increase flows out of the formal (informal) sector (layoffs? change in status?) Reduce flows (hiring) into the formal (or informal) sector

Does the structure of MWs make a difference?Brazil recently reinstated new higher state minimum wages (MWs) in several states

What do we mean by Informality?In Brazil workers who have a “signed work card”enjoy

A minimum of 25 days of vacation;Maximum work week of 44 hours;Overtime premium of 50%;13th month pay;4 months of maternity leave; 5 days paternity leaveMW set a level necessary to pay for necessities of a worker and his or her family (including housing, food, education. Leisure, clothing, hygiene, transportation and social security) One month notice for firing Some UI, Fund for Unemployment

What to expect in terms of informality?We might expect

Increase in MW, holding Enforcement constant decline in EF (increase in flows out of EF; decrease in flows in )Increase in EINF , if this sector does not pay the MWdecline in EINF , if this sector pays the MW

Increase in Enforcement, holding MW constant increase or decrease in EF

decline in EINF

What do we know about impact of MW?Informal Sector:

Found to have a spike at the MW, But not clear whether E responds to changes in MWElasticity of E w.r.t. MW

<0 (Faynzylber, 2001; Lemos 2004)>0 (Carneiro, 2000; Carneiro et al. , 2001)

Formal Sector:Found to have a spike at the MWElasticity of W w.r.t. MW ranges from 0 to large:

0.4-0.6 (Veloso, 1990); N.S. (Soares, 2002)Elasticity of E w.r.t. MW typically small neg. or not. signif. :

-0.001 -0.0024 in long run (Carneiro et al. , 2001; Lemos, 2004)

All Full-Time Workers : Formal v. Informal

Minimum WagesToday some states have one MW while others have multiple MWsReturn to State level MWs

1988-2000: One National MW2000-present: State “wage floors” allowed*

2000 – Rio de Janeiro (3-tiered occupation-specific MW)2001 – Rio Grande do Sul (4-tiered Industry-specific MW)2006 – Parana2007 – Sao Paulo

*Constitution only allows one MW but Article 7, para. 5 mandates “wage floors” commensurate with the level and difficulty of a job.

Table 3: Rio Grande do Sul (Porto Alegre) - Industrial Categories Covered by Each Minimum Wage Level (2002-2008)

Wage Level 1a) na agricultura e na pecuária;b) nas indústrias extrativas;c) em empresas de pesca;d) empregados domésticos;e) em turismo e hospitalidade;f) nas indústrias da construção civil;g) nas indústrias de instrumentos musicais e brinquedos;h) em estabelecimentos hípicos.Wage Level 2a) nas indústrias do vestuário e do calçado;b) nas indústrias de fiação e tecelagem;c) nas indústrias de artefatos de couro;d) nas indústrias do papel, papelão e cortiça;e) em empresas distribuidoras e vendedoras de jornais e revistas e empregados em bancas, vendedores ambulantes de jornais e revistas;f) empregados da administração das empresas proprietárias de jornais e revistas;g) empregados em estabelecimentos de serviços de saúde.Wage Level 3a) nas indústrias do mobiliário;b) nas indústrias químicas e farmacêuticas;c) nas indústrias cinematográficas;d) nas indústrias da alimentação;e) empregados no comércio em geral;f) empregados de agentes autônomos do comércio.Wage Level 4a) nas indústrias metalúrgicas, mecânicas e de material elétrico;b) nas indústrias gráficas;c) nas indústrias de vidros, cristais, espelhos, cerâmica de louça e porcelana;d) nas indústrias de artefatos de borracha;e) em empresas de seguros privados e capitalização e de agentes autônomos de seguros privados e de crédito;f) em edifícios e condomínios residenciais, comerciais e similares;g) nas indústrias de joalheria e lapidação de pedras preciosas;h) auxiliares em administração escolar (empregados de estabelecimentos de ensino).

Rio de Janeiro MW Classification is by Occupations (movement from one wage level to another)

Year Month1 2 3 4 1 2 3 4 5 6

2002 May 11.11% 13.04% 13.19% 13.33% 13.20%

2003 March 10.42% 15.00% 14.40% 13.85% 13.33% 12.86%May 20.00% 20.00% 20.00% 20.00% 20.00%

2004 January 9.43% 10.51% 10.49% 10.47% 10.46% 10.44%May 8.33% 8.33% 8.33% 8.33%June 8.33%

2005 January 6.90% 6.89% 6.96% 7.03% 7.10% 6.88%May 10.85% 10.85% 10.85% 10.85%June 15.38%

2006 January 13.33% 13.33% 13.33% 13.33% 13.33% 13.33%May 8.35% 8.35% 8.35% 8.35%June 16.67%

2007 January 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%May 8.57% 5.98% 5.98% 5.98% 5.98%

2008 January 10.70% 10.70% 10.70% 10.70% 10.70% 10.70%April 9.21%

Federal Minimum

Rio Grande do  Sul Rio de Janeiro

Nominal Minimum Wage Increases(% Change from previous minimum wage)

Enforcement1943 CLT (Consolidação das Leis do Trabalho)

Gave system of labor courts a pre-eminent role in enforcement of contracts and dispute resolution.Three tiers: local (varas), regional, and superiorVaras are the courts where individual workers or unions file their cases – employer notified and invited to provide documents proving innocence.

Employer bears full burden of proof.Biased toward workers. (80% of cases in Minas Gerais decided in favor of the worker – Camargo, 2000)Lengthy process (average time 700 days from time of filing to resolution)Costly to employer (average - R$1,000 plus 2% for court; employees pay nothing)

Pesquisa Mensal de Emprego (PME)January 2002 – April 2008 (“new methodology data”)Six largest metropolitan areas

Bahia (Salvador)Rio de JaneiroPernambuco (Recife)Sao Paulo (Sao Paulo)Minas Gerais (Belo Horizonte)

Random sample within each but relative size is proportional to population

Between 12,000 to 20,000 observations per city in a given month

Rotating panel

Impact of Minimum Wages and Enforcement

Begin by seeing if an effect on wages…

Estimation StrategyAnalytical sample:

Men, ages 15-70, first two observationEstimate wage effects

On those who stay in the same job in t=0 and t=1 Separate estimates for those in formal and informal jobsSeparate estimates for all, less educated, more educatedNominal wages and minimum wages, holding city specific inflation constantBase Regressions:

iSSSSSSiS µnfIEnfMWEnfMWW +∆+∆∆+∆+∆=∆ λφβα )*(

iSSSS

SSSSSiS

µnfIEnfMMWEnfOMWEnfMWMMWOW

+∆+∆∆+∆∆+∆+∆+∆=∆

λφφβαα

)*()*(

2

121

Preliminary findings using only Federal MW

Individual First Difference Wage regression for workers who have a formal sector job at time t=0.

All More Educ Less Educ All More Educ Less Educ

∆ln(MW) 0.224 0.210 0.267 -0.141 -0.116 -0.187[0.012]*** [0.015]*** [0.019]*** [0.059]** [0.075] [0.092]**

∆Enforcement - - - -0.122 -0.175 -0.061[0.063]* [0.081]** [0.102]

∆Enforcement x ∆ln(MW) - - - 0.555 0.495 0.687[0.089]*** [0.115]*** [0.139]***

Observations 494429 335177 159252 494429 335177 159252

Number of individuals 201894 143525 72000 201894 143525 72000

Marginal Effects with Enforcement:

∆W/ ∆MW - at mean Enforcement 0.234 0.219 0.278∆W/∆Enforcement - at mean MW 0.042 -0.029 0.142

without Enforcement with Enforcement

Note: Panel data on individuals includes only first two observations for each individual. *significant at 10%; ** significant at 5%; *** significant at 1%.

Estimation StrategyFlow Analysis

Effect of MW and Enforcement on flows 1. From formal jobs to other labor market states (firing)2. From other labor market states into formal (hiring)

Other states: informal, self-employed, unemployed, out of the labor force

Things to consider:Need to control for business cycles, age, education , tenure, city specific effectsUse nominal or real MW?Use lagged change in MW given inflexibility in firingUse OLS and not Probit

Table 7 ‐ Monthly Transition Matrix

T=0 Employment Statu FE IE SE UE OLF PB EM Total

Formal Employees 246,017 8,035 2,645 2,120 3,811 3,339 841 266,808

(FE) 92.21% 3.01% 0.99% 0.79% 1.43% 1.25% 0.32% 100.00%

Informal Employees 10,020 67,276 8,138 3,311 5,202 982 1,099 96,028(IE) 10.43% 70.06% 8.47% 3.45% 5.42% 1.02% 1.14% 100.00%

Self‐Employed 2,849 8,562 99,516 2,449 5,077 389 5,467 124,309(SE) 2.29% 6.89% 80.06% 1.97% 4.08% 0.31% 4.40% 100.00%

Unemployed 2,229 4,435 2,940 34,236 14,463 237 160 58,700(UE) 3.80% 7.56% 5.01% 58.32% 24.64% 0.40% 0.27% 100.00%

Out  of Labor Force 2,947 5,906 5,477 15,346 191,436 797 443 222,352(OLF) 1.33% 2.66% 2.46% 6.90% 86.10% 0.36% 0.20% 100.00%

Public 3,556 986 321 221 777 50,920 117 56,898(PB) 6.25% 1.73% 0.56% 0.39% 1.37% 89.49% 0.21% 100.00%

Employer 898 1,205 5,429 158 434 123 27,180 35,427(EM) 2.53% 3.40% 15.32% 0.45% 1.23% 0.35% 76.72% 100.00%

Total 268,516 96,405 124,466 57,841 221,200 56,787 35,307 860,52231.20% 11.20% 14.46% 6.72% 25.71% 6.60% 4.10% 100.00%

T=1 Employment Status

Flows from Formal Employment into Other States (Probit Analysis)

-1 -2 -3 -4 -5 -6 -7 -8Informal

Employees (IE)

Unemployed (U)

Self-Employed (SE)

Out of the Labor Force (OLF)

Informal Employees (IE)

Unemployed (U)

Self-Employed (SE)

Out of the Labor Force (OLF)

ln(hourly MW)_t-1 -0.162 -0.44 -0.497 0.443 0.241 -1.606 -1.107 0.985[0.240] [0.407] [0.386] [0.302] [0.496] [0.682] [0.635]* [0.781]

Enforcement_t-1 0.15 0.652 0.836 0.358[0.399] [1.095] [0.787] [0.621]

[Enforcement x ln(MW)_]t-1 -0.593 -0.279 -1.083 -0.778[0.638] [0.858] [0.995] [0.507]

Observations 190188 183700 183832 186563 190188 183700 183832 186563

Flows into Formal Employment - New Hires (Probit Analysis)

Informal Employees

(IE)

Unemployed (U)

Self-Employed (SE)

Out of the Labor Force (OLF)

Informal Employees (IE)

Unemployed (U)

Self-Employed (SE)

Out of the Labor Force (OLF)

ln(MW)_t-1 -0.121 0.174 0.141 -0.906 1.458 1.306 2.026 0.392[0.254] [0.505] [0.405] [0.300]*** [0.527]*** [1.395] [0.841]*** [0.492]***

Enforcement_t-1 1.471 -1.654 -4.39 1.38[0.418]*** [0.813]* [1.069]*** [0.776]**

[Enforce x ln(MW)] _t-1 -2.316 1.374 3.187 -1.854

[0.681]*** [1.068] [0.671]*** [0.614]

Standard errors in bracket, * significant at 10%; ** significant at 5%; *** significant at 1%

From Formal Employment at time t-1 into the following states in time t:

Notes: Regression includes, Exper and Exper2, dummies for completed years of education, city, year and month fixed effects. The hourly minimum wage is the National minimum in 1997 Reais. Recife is the base city and "no education" the base for the education variables.

From the following states in time t-1 into formal employment at time t:

VERY Preliminary findings using FEDMW only

Preliminary Findings and Next StepsFindings:

MWs increase Ws in formal, especially less educatedHigher enforcement raises W of less educated; no effect on W of more educatedMW alone has no effect on flows out of or into formal; When interacted with enforcement may dampen flows into formal

Next Steps:Implement what we propose:

Estimate flows for informal Debug the Rio de Janeiro data so as to estimate MMW

Incorporate leads and lags of MWsCollect more enforcement dataConsider instruments for MWs (political variables) to explain endogeneity of MMW choice