Job Market Paper
Do Institutions Remove Inflation's Grease? Evidence from Brazil's Indexed Minimum Wage (with Emilio Colombi)
How do labor market institutions shape the propagation of inflation shocks? We address this question by studying Brazil's annually indexed minimum wage in a high-inflation context. Conventional wisdom suggests that inflation can "grease" labor market adjustments, but institutional wage-setting may alter this mechanism. Using administrative data, we show that indexation creates upward nominal wage rigidity: workers exposed to the policy experience fewer month-to-month wage increases before indexation events, and firms anticipate the policy by rigidifying wages of workers who will be newly bound. We evaluate the macroeconomic implications by introducing a cost-push shock to a New Keynesian model with heterogeneous labor and an indexed minimum wage. While staggered indexation amplifies the inflation as grease mechanism by introducing nominal rigidities, anticipation dampens it via intertemporal substitution. Overall, cost-push shocks have a lower effect compared to a setting where the minimum wage indexes every period. Our findings demonstrate that even in high-inflation environments, the institutional structure of wage-setting fundamentally shapes how shocks propagate through the economy.