Essays on minimum wages and declining wage inequality in Latin America

This thesis studies the factors behind the declining wage inequality in Latin America, focusing on minimum wage policies. Chapter 1 studies potential explanations of the declining wage inequality in Brazil such as changes in demographic/skill composition, wage structure, occupations/sectors and minimum wage. I perform a decomposition of wage inequality to quantify composition and price effects, and use a CES production function to estimate the effects of skill supply on relative wages. I find that the fall in upper-tail inequality is given by changes in the returns to education and experience, while the fall in lower-tail inequality is also explained by those to minimum wage and female workers. Chapter 2 documents the effectiveness of the minimum wage on compressing lower-tail inequality without harming employment significantly. The study complements empirical literature on the subject by identifying the effects of the minimum wage through its level of bindingness on the wage distribution across regions. I find that 35 percent of the decline in lower-tail inequality is attributed to the minimum wage, while its effects on upper-tail inequality are negligible. Prior studies find significant effects throughout the wage distribution, I argue that these are likely to suffer from misspecification and sample selection issues. Chapter 3 is motivated by the findings from previous chapters. I develop a two-region economy in which one region employs labour more efficiently than the other and unemployed workers search for jobs in both regions. I study the effects of setting a minimum wage which is particularly binding in the low-productivity region. Under a common market of unemployed workers, a binding minimum wage changes the value of unemployed search affecting wage-setting rules and employment in both regions. I illustrate the use of the model by performing counterfactual and policy experiments motivated by the desire of providing potential explanations of intraregional inequalities.