Essays on Minimum Wages and Trade Shocks

Abstract

This dissertation studies how minimum wages and trade shocks affect developing world countries. Chapter 1 studies how minimum wages affect earnings inequality in countries with a large informal sector. I study the case of Brazil throughout the 2000s. Empirically, I find that the minimum wage increased aggregate inequality due to its inequality-increasing effects on the informal sector. I then develop a model to investigate when and how raising the minimum wage increases inequality and reduces welfare. Lastly, I extend the model into a quantitative framework, and calibrate it to Brazilian data. By generating substantial informality, the observed hike in the minimum wage increased overall inequality by 11.5%. Chapter 2, coauthored with Rowan Shi, investigates how trade shocks affect the labor allocation within a local labor market. By studying the Brazilian import liberalization, we uncover a new margin for the impact of trade: industrial reorganization among non-traded producers. Empirically, we show that large establishments in regions more exposed to the policy were more likely to survive and grow compared to small establishments. We then provide empirical evidence on the importing channel: larger plants in high exposure regions were more likely to start importing, with new importers growing the most over the liberalization period. Lastly, we develop a model of heterogeneous producers incorporating this mechanism. The theory replicates the empirical findings, and implies that these reallocation patterns are welfare-enhancing. Chapter 3 studies the organization of labor within Brazilian firms, and how it is affected by trade shocks. I show that firms organize labor hierarchically, hiring more low-paid workers at bottom layers. Firms that expand tend to add a new highly-paid top layer, reducing wages and increasing hours in pre-existing layers. This result suggests that firm organization has implications for within firm wage inequality. Finally, I show that export demand shocks causes firms to reorganize, consequently affecting wages and hours at the layer level.