Firm Productivity and Wage Growth: Evidence from Brazilian Manufacturing Data

The researchers investigate the dynamics of firm productivity and worker compensation in developing economies by studying firm-level Brazilian manufacturing data for a period of high economic growth following economic reform.

Recent work suggests that market frictions can explain observed differences in firm productivity distributions between countries, with developing economies featuring a relatively larger proportion of small, unproductive, stagnant, and low-pay firms. Following the removal of such barriers to growth, firms are frequently observed to grow fast and increase productivity – but less is known about the extent to which such growth episodes are accompanied by changes to the wage structure. As Brazil recently underwent economic reform followed by a high-growth episode, this study will use detailed Brazilian data to estimate changes to worker compensation of firms that experience high growth from 1996-2012.

The team examines which firm-level characteristics translate into higher wages for the firm’s employees. They hypothesize that persistent productivity innovations are an important driver of wage growth at a firm, and test this hypothesis by employing a rich matched employer-employee database that follows firms and workers in the manufacturing sector for 1996-2012.

This hypothesis implies that private enterprise growth is closely related to inequality, which has direct policy implications for low-income countries as tackling inequality is among the highest of priorities cited by policy-makers. This investigation could potentially lend support to the view that economic growth and equitable distribution are common goals that can be achieved by removing obstacles to private sector development.