Background

2.2.1. The Minimum Wage

The minimum wage has been instituted as a mechanism to reduce the social inequalities by ensuring a minimum income especially for the low-wage workers.

In the XIX century, the Encíclica Rerum Novarum written by the Pope Leo XIII states that the wage should meet the basic needs of all workers and their families in order to ensure the human being’s dignity.

In 1948 the United Nations General Assembly approves the Universal Declaration of Human Rights which includes in the text: “Article 23. (…) Everyone has the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment.

Everyone, without any discrimination, has the right to equal pay for equal work. Everyone who works has the right to just and favorable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection. Everyone has the right to form and to join trade unions for the protection of his interests.

(…)”.

In 1970 it was held the 131^st General Conference of ILO (International Labor Organization) which was named as C131-Minimum Wage Fixing Convention to determine a fixed wage floor, mainly to the developing countries that includes Brazil. It was established in the article: “Article 1.

(…)§1.Each Member of the International Labour Organisation which ratifies this Convention undertakes to establish a system of minimum wages which covers all groups of wage earners whose terms of employment are such that coverage would be appropriate. (…) Article 2. §1. 1. Minimum wages shall have the force of law and shall not be subject to abatement, and failure to apply them shall make the person or persons concerned liable to appropriate penal or other sanctions. (…)”.

In Brazil, the federal minimum wage was introduced in 1930s by the President Getúlio Vargas with the main purpose of creating a social protection to the working class through a minimum wage guaranteed by law.

In the 1988 Constitution of the Federative Republic of Brazil, still currently in place, the article 7º, section IV, guarantees a “nationally unified minimum monthly wage, established by law, capable of satisfying their basic living needs and those of their families with housing, food, education, health, leisure, clothing, hygiene, transportation, and social security, with periodical adjustments to maintain its purchasing power, it being forbidden to use it as an index for any purpose”.

The minimum wage in Brazil is recalculated annually by the federal authorities based on the living costs of the population for the current year. The official inflation rate index INPC (The

National Consumer Price Index) is currently used to calculate the annual minimum wage for the next period.

In Figure 1 we can see the evolution of the nominal minimum wage in Brazil starting in the year of 1995 when the Plano Real was introduced to bring price and currency stability to the economy.

FIGURE 1

Nominal minimum wage rate evolution in Brazil from 1995 to 2001

Source: IPEA data

The upward slope of the minimum wage curve reflects the effect of the inflation rate in the nominal wage value.

The labor market in Brazil is regulated by the 1988 Constitution and also by the Labor Code known as CLT (Consolidação das Leis do Trabalho) or Consolidation of Labor Laws which ensures a wage floor to all formal workers.

In case of non-compliance with the minimum wage, the firms are subjected to penalties to be determined by the local Labor Justice. The most common penalties are the payment of the net value of the paid wage and the minimum wage as well as the proportional amount for all the labor costs to be paid by the firms, that include all the payroll taxes, the Brazilian Government Severance Indemnity Fund for Employees (FGTS), the annual leave and the social security contribution.

The Labor Justice may however, determine additional penalties based on the plaintiff’s legal claim.

200,00 400,00 600,00 800,00 1.000,00 1.200,00

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Wage

Year

2.2.2. Informality and the Minimum Wage

As the minimum wage law is part of the labor market policies and regulation, it can be assumed that only the formal firms would be affected by the mandated wage floor, since it is expected that the informal firms do not operate under any legislation and would not have any obligation to follow the law.

Neri et al (2001) presents the unexpected results that, besides the effects in the wages of traditional formal workers, the minimum wage has impact in the wage of the informal labor market as well. They observed two aspects of the informal labor market: (i) high number of informal workers who receive the exactly one minimum wage and (ii) the minimum wage is used as a numeraire-effect to determine the informal workers wage.

The numeraire-effect is used to determine the salary value based on the multiples of the minimum wage. Neri et al (2001) have suggested that the minimum wage can be used as a reference for the salary definition and for its periodic adjustment.

Based on Neri et al (2001) conclusions, it can be inferred that although the informal sector, in theory, is not subject to the minimum wage policies and regulations, in practical, the minimum wage is followed by the informal sector as a salary reference.

Ulyssea (2014) raises more elements to the informality debate as his study proposes to investigate the effects of firms’ informality in the economic development. He defines two margins of informality: (i) extensive margin when firms do not formally register and pay entry fee; (ii) intensive margin when firms register, but the salary is paid “off the books”.

The study suggests that the decisions about formalizing or not the firm depends on the entry costs and the advantage costs of being informal. Nevertheless, the employer might prefer to formalize the firm but paying “off the books” to avoid labor taxation. The effective enforcement has positive impact in reducing the informality, but negative impact in the economic welfare.

Both studies are important for the discussion on the minimum wage, as they shed a light in the informal labor market showing that the behavior of the informal firms’ owners around the labor policies and regulations depend on the possible financial gains and losses in complying or not with the wage floor constraint.