Real increase in the minimum wage does not reduce inequality and worsens the gap

Few issues have as much popular and electoral appeal as the minimum wage adjustment. The minimum salary is received by 35% of Brazilians with a formal contract, in addition to being the reference for retirement, social security benefits and salary negotiations. From a political perspective, it is used as evidence of the government’s supposed commitment to social justice.

President Luiz Inácio Lula da Silva (PT) this year reestablished the policy of real increase in the minimum wage adopted during PT administrations, linking the initiative to the reduction of inequality. The defense of better income distribution was one of the themes of his speeches at the G20 summit and the United Nations General Assembly.

However, the real increase in the minimum wage does not contribute to reducing inequality. In fact, the effect may be the opposite.

A study by the Center for Research on Macroeconomics of Inequalities (Made) at USP specifically analyzed the effects of the minimum wage policy on income distribution between 2014 and 2021. The result surprised the researchers. In the analysis of the total period, the real adjustment policy ended up increasing the Gini index, which measures income concentration, by 0.018. The index varies from 0 to 1. The closer it is to 1, the more concentrated the country’s income is.

Economist Gustavo Serra, one of the authors of the study, believes that the result is due to the period analyzed, according to him a specific moment of fragility in the labor market. “We made comparisons and observed that, in periods when employment numbers are high, the real adjustment can have important impacts on reducing inequality and growth”, he says.

However, economist Paulo Tafner, president of the Institute of Mobility and Social Development, says that the research results corroborate the survey he carried out.

According to Tafner, the minimum wage adjustment benefits the richest 40% of the active population more strongly than the poorest 40% – thus increasing the difference between income groups.

“In the popular imagination, the minimum wage is a value received by the ‘poor’. Therefore, the increase should end up in the hands of people on the ‘bottom floor’ of Brazilian society. But that is not what happens”, says the economist, who is one of the authors of a book on the subject that will be published in October.

Minimum wage benefits formal workers

The explanation for this effect is relatively simple. The biggest impact is on people in the formal job market, including public employees and retirees. The effect of the adjustments on other workers in the private sector – especially informal workers, who make up 40% of the active population – is varied and becomes diluted according to the workers’ bargaining power.

“People with a formal contract, even those who only receive a minimum wage, are very far from being considered poor”, he states.

Poverty in Brazil, in fact, has much lower parameters. A family of four with an income of one minimum wage each is already considered middle class, notes Tafner. The poorest half of workers receive, on average, R$537 per month, according to data from the IBGE Continuous National Household Sample Survey.

Tafner analyzed Pnad Contínua data on the per capita income distribution of retirees and pensioners earning one minimum wage. The conclusion was that, out of a thousand people surveyed, only 32% were in the poorest half of the population. The remaining 68% are part of the richest half of the country. The biggest beneficiaries, according to him, are in range 7, on a wealth scale of 1 to 10 (according to the table below).

“When you increase the minimum wage above inflation, you are transferring income to a portion that needs the resources less and, thus, increasing the disparity with the lower portions,” he states.

If the government’s priority is to improve the situation of the poorest 20% of the country, Tafner guarantees that increasing the minimum wage will definitely not be the solution. “For a simple reason: in Brazil, the minimum wage is not minimum,” she says.

For him, benefiting the tens of millions of people who receive this remuneration is yet another way of fueling the popularity of governments, with a focus on electoral dividends. “You don’t need to be a political scientist to reach that conclusion,” he says.

Real increase in the minimum wage compromises fiscal framework goals

For Juliana Inhasz, macroeconomics professor at Insper, in addition to being inefficient in combating inequality, the new minimum wage adjustment policy goes against the government’s fiscal needs – which counts every penny to increase revenue and be able to eliminate the deficit in 2024 , as established by the tax framework.

“There will be consequences that cannot be ignored”, he states, recalling the impact of the minimum wage on expenses such as social security and assistance benefits, salary bonuses and unemployment insurance.

According to the Ministry of Planning, each R$1 increase in the minimum wage causes a net fiscal impact of R$368.5 million on the Union’s accounts. In the 2024 Budget Guidelines Law Project (PLDO), the ministry predicted a floor salary of R$1,389 (R$69 above the current figure), which would lead to a nominal increase in spending of at least R$25.4 billion next year.

However, the impact will be even greater. This is because the PLDO, sent to Congress in April, did not foresee a real increase in remuneration, but only the pass-through of 2023 inflation, measured by the INPC, which the government estimates at 5.16%.

It turns out that Law 14,663/2023, sanctioned by Lula at the end of August, establishes a real gain for the minimum wage equivalent to the economic growth of two years before. Thus, the reference for 2024 will be the GDP variation in 2022, of 2.9%.

In the sum of the 2023 INPC estimated by the government (5.16%) with the increase in GDP in 2022 (2.9%), the total adjustment of the minimum next year would be approximately 8.2%, or around R $108, causing a fiscal impact of almost R$40 billion.

Juliana Inhasz notes that this readjustment can also generate inflationary pressure. “Nothing increases inequality more than inflation, because it hits poor people directly and more strongly. There is no point in giving with one hand and taking away with the other”, says the economist.

She draws attention to the high level of informality in the labor market – which reached a record in absolute numbers last year, with 38.8 million workers in this condition. “They are the most fragile, without qualifications, without a portfolio and without negotiating power. They will probably not be able to keep up with the wave of adjustments and are condemned to be further away from the others”, she observes.

Increasing the minimum wage should be linked to productivity, says economist

The real minimum wage adjustment policy has other problems. According to Juliana Inhasz, it is a mistake not to link the benefit to productivity gains. “We need to think about a productivity policy so that workers can develop or improve skills that are valued in the market,” she says.

For her, the focus should be on productivity and growth. “You can’t combat inequality without making the economy grow,” she says. To achieve this, the economy needs to be adjusted, with controlled inflation and responsible fiscal, monetary and exchange rate policies.

At the same time, it is necessary to invest in qualifications so that people can produce more, obtain jobs and fair remuneration and have their purchasing power guaranteed. “The concept of combating inequality is much broader,” he says.

Focused programs have more impact on poverty reduction

There is a consensus among liberal economists that the most effective way to reduce inequality is to increase programs focused on the low-income population, with the direct transfer of resources. For the Insper economist, the transfer policy should be redesigned, with unification of benefits. “The results would be better, with lower expenses and fiscal impacts,” she says.

Paulo Tafner recalls the emergency aid, implemented during the pandemic, which promoted one of the largest income transfers with poverty reduction in the country. But, according to him, the left “hates” focused programs and has a tradition of universalistic benefits.

As a result, they often end up subsidizing expenses for those who don’t need them. “There are people who are very well off who take free medicine for high blood pressure or diabetes. What’s the point of spending money on people who don’t need it? We need to guarantee access to those who can’t afford it,” he says.

For him, in addition to ideological distortions, there are conceptual mistakes in the discussion on the topic. “The policy of increasing above inflation is nonsense. Using the minimum wage to combat inequality is like using a hammer to tighten a screw. It is not the appropriate instrument. The focus needs to be on the truly poor”, highlights the professor.