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DOI: http://dx.doi.org/10.
1590/0103-6351/3943
The relation between labor productivity and

wages in Brazil: a sectoral analysis
A relação entre produtividade de trabalho e salário no Brasil: uma análise setorial
Erik S. Katovich (1)

Alexandre Gori Maia (2)
(1)
University of Wisconsin-Madison
(2)
Universidade de Campinas
Abstract Resumo
Labor productivity is a crucial long-run de- A produtividade do trabalho é um determinante
terminant of real wages. Nonetheless, wage fundamental do salário real. Entretanto, as dinâ-
and productivity dynamics often diverge in micas do salário e produtividade frequentemente
practice due to a range of economic and in- divergem na prática em função de uma série de
stitutional factors. This study analyzes the fatores econômicos e institucionais. Este estudo
relation between the dynamics of labor pro- analisa a relação entre as dinâmicas da produ-
ductivity and wages in Brazil from 1996 to tividade do trabalho e do salário no Brasil entre
2014, and adopts a sectoral perspective to ac- 1996-2014, adotando uma abordagem setorial
count for divergent trends among economic para considerar divergências entre setores econô-
sectors. Analyses are based on pooled data micos. As análises baseiam-se em dados do Siste-
drawn from the National Accounts and the ma de Contas Nacionais e da Pesquisa Nacional
Pesquisa Nacional por Amostra de Domicílios, por Amostra de Domicílios, e em estimativas de
and hierarchical data models are estimated modelos hierárquicos para avaliar os impactos de
to assess the impacts of state- and sector- fatores regionais e setoriais nos salários indivi-
level factors on individuals’ wages. Results duais. Os resultados indicam que a produtividade
indicate that productivity is significantly está positivamente associada ao salário em todos
positively associated with wage levels for os setores econômicos, mas que fatores institu-
all economic sectors, but that institutional cionais, como formalização do trabalho e salário
factors such as labor formalization and mínimo, influenciam de maneira igualmente sig-
minimum wage exert equally significant im- nificativa, sugerindo que o crescimento do salário
pacts, suggesting that wage growth over the entre 1996-2014 foi tanto um resultado de mu-
1996-2014 period was as much the result of danças institucionais quanto de transformações da
institutional changes as of transformation of estrutura produtiva.
Brazil’s productive structure.
Keywords Palavras-chave
labor market; labor productivity; sectoral mercado de trabalho; produtividade do trabalho;
structure; economic development; wage de- estrutura setorial; desenvolvimento econômico; de-
terminants. terminantes do salário.
JEL Codes E24; J24; O47. Códigos JEL E24; J24; O47.
v.28 n.1 p.7-38 2018 Nova Economia� 7

Katovich & Maia
1 Introduction
Labor productivity, understood as the value of output produced per unit

of labor input, is a crucial long-run determinant of workers’ real wages.
Ultimately, workers cannot sustainably earn more value than they create.
Neoclassical economic theory formalizes this notion in its assertion that a
worker’s wage is equivalent to the marginal product of her labor, that is,
her productivity (Cahuc et al., 2014). Nevertheless, labor productivity and
wage dynamics often diverge substantially in practice, due to a range of
institutional and market forces, and this divergence can have important
implications for a country’s economic development. When real wages lag
behind productivity growth, the distribution of income between capital
and labor shifts in favor of capital, potentially worsening income inequal-
ity and depressing aggregate demand. When wage growth exceeds pro-
ductivity growth, export competitiveness and investment may suffer (Bie-
sebroeck, 2015).
In light of the theoretical importance of labor productivity to wage
growth and economic development, this study examines the relation be-
tween productivity and wages in Brazil between 1996 and 2014. This time
period encompasses two distinct stages in Brazil’s recent economic trajec-
tory: the movement towards liberalization and market-oriented reforms
that characterized the late 1990s, and the commodity boom and expan-
sion of pro-social reforms of the 2000s. The first stage is characterized
by stagnation in productivity and real wages, while the second stage is
marked by modest growth in productivity and significant growth of real
wages (Maia; Menezes, 2014; IPEA, 2014).
Importantly, these overall trends disguise broad variation in productiv-
ity and wage growth at the sectoral level. Some areas of Brazil’s economy,
such as industry, have seen low growth in productivity, losses in com-
petitiveness, and shrinking representation in national GDP (Jardim; Perin,
2016; Hiratuka; Sarti, 2015). Other areas, such as agriculture, have expe-
rienced rapid productivity growth and substantial wage gains (Gasques
et al., 2014; Maia; Sakamoto, 2014). These evolving dynamics complicate
traditional notions of development via industrialization, and suggest alter-
native sectoral priorities and strategies (Baiardi, 2016).
Motivated by these changing dynamics, this study adopts a sectoral
perspective in order to address the following questions: i) to what degree
8 Nova Economia� v.28 n.1 2018

The relation between labor productivity and wages in Brazil
have gains or losses in wages been the result of gains or losses in produc-
tivity? ii) have productivity gains constituted the primary engine of wage
growth, or do they pale before institutional or demographic changes? iii)
why do different economic sectors present such varying rates of produc-
tivity and wage growth? This sectoral perspective complements previous
analyses that examine labor productivity and income in Brazil on a na-
tional level (Romanatto et al., 2008).
We find a universally positive association between labor productivity
and real wages. More specifically, our estimates indicate that elasticity
between labor productivity and real wages is largest for sectors where
earnings are directly based on productivity (such as pay-on-commission
in real estate and commerce), or where productivity is easily measured
(industry). In turn, elasticities are smaller for those sectors where worker
productivity is more difficult for firms to measure, or where there are
high levels of informal labor (agriculture and construction). Furthermore,
results indicate that wages in many sectors are also strongly influenced
by institutional forces, such as worker formalization, labor unions, and
minimum wage.
The study is organized as follows. Part 2 explores theoretical explana-
tions of the frequently observed divergence between labor productivity
and wages, and situates this debate in the Brazilian context. Part 3 re-
views the methodology and data used to compute labor productivity and
real wages for eight sectors of the Brazilian economy between 1996 and
2014, and then develops regression models to estimate productivity-wage
elasticities for each sector. Part 4 presents data series on sectoral labor
productivity and real wages, as well as regression results, and interprets
these data and results in light of recent economic developments in Brazil.
Finally, Part 5 offers conclusions.
2 Theoretical interpretations of productivity-wage

relationship
According to neoclassical labor economics, a worker’s wage equates to

that worker’s marginal product of labor in equilibrium. Under perfect
competition, a market wage below productivity would induce the firm to
hire workers until their marginal product fell below the wage rate (under
v.28 n.1 2018 Nova Economia� 9

Katovich & Maia
the assumption of diminishing marginal returns). A market wage greater

than productivity would induce the firm to fire workers until remaining
employees’ marginal product rose sufficiently to restore equilibrium. If the
firm were a price-maker under imperfect competition, the impacts of the
firm’s hiring and firing behavior on the market wage would only amplify
this equilibrating tendency (Biesebroeck, 2015; Cahuc et al., 2014).
There are a number of theoretical explanations for why wages rarely
equate to productivity levels in practice. Firstly, wages account for only a
fraction of total employee compensation, which may include additional
benefits such as pension or insurance. If the proportion of these additional
benefits in total compensation grows, then stagnating real wages could
actually disguise an increase in overall employee compensation (Feldstein,
2008). In Brazil, where formal employee benefits such as a 13th salary, sev-
erance pay, and health insurance are prevalent, recent increases in worker
formalization could make this factor a significant determinant of produc-
tivity-wage divergence (IPEA, 2009).
Secondly, markets are characterized by information asymmetries, in
which firms find it difficult to assess workers’ true productivity and effort
levels. In this case, firms pay workers according to productivity signals,
such as education, which may not directly align with those workers’ true
productivity (Spence, 1975). Firms may also construct compensation and
promotion schedules that incentivize high productivity at the outset of
an employee’s career by promising higher compensation at the end of
the career, thus temporally misaligning productivity and wage (Biese-
broeck, 2015).
Thirdly, firms may systematically discriminate against workers based
on race, gender, or other characteristics, imposing wage penalties on dis-
criminated workers who are equally as productive as their non-discrim-
inated colleagues (Blau; Kahn, 2016; Sakamoto; Kim, 2014; Fryer, 2011).
Specific to Brazil, Bailey, Loveman and Muniz (2013) present evidence
on continuing racial discrimination in employment, and Casari, Bastos,
and Feltre (2009) measure substantial gender discrimination in employ-
ment, suggesting that the racial and gender composition of economic
sectors may be an important factor in understanding wage-productivity
divergence in Brazil.
Fourthly, as argued in Manning (2010), labor markets are inherently im-
perfect, and are characterized by both firm and employee rents. Both par-

ties face high search costs, and may thus be willing to close employment
agreements at wage rates divergent from productivity rates. The actual di-
vision of rents between workers and firms will result from the relative bar-
gaining positions of these groups, as well as the bargaining mechanisms
(Pissarides, 1985). Under this interpretation, increasing formalization of
the labor force and decreasing unemployment in Brazil could have im-
proved labor’s bargaining power throughout the 2000s, thus contributing
to rising wages relative to productivity.
Finally, overarching these microeconomic dynamics, technology-biased
innovation and investment have been identified by many authors as a
cause of declining labor shares of income (in other words, as a cause of
divergence between labor productivity and wages) across industries and
countries (Hogrefe; Kappler, 2012; Bentolila; Saint Paul, 1999). In this anal-
ysis, capital-augmenting technical progress, such as the widespread adop-
tion of computers from the 1990s onwards, may generate factor biases
between capital and labor, with the degree of bias determined by activity-
specific elasticities of substitution between factors (Karabarbounis; Nei-
man, 2013; Findlay; Jones, 1999; Feenstra; Hanson, 1999).
Changes in total employee compensation, information asymmetries,
discrimination, bargaining power, and capital-augmenting technological
progress may have widely varying impacts for different sectors of the Bra-
zilian economy, depending on the characteristics of each sector. Employee
benefits and career-long incentive structures may have large impacts in
highly formalized sectors such as public administration or finance, and
smaller impacts in agriculture or commerce. Shifts in labor bargaining
power through mechanisms such as labor organization (unions), formal-
ization, and lower unemployment may have greater heft in sectors domi-
nated by low-skilled workers, such as agriculture and construction, rela-
tive to sectors characterized by higher barriers-to-entry. And differential
rates of technology-adoption across sectors may distort the transmission
of productivity gains into real wages, depending on whether technologies
are capital- or labor-augmenting for any specific economic activity. One
recent development in the Brazilian labor market that has disproportion-
ately impacted low barrier-to-entry sectors is the significant real valoriza-
tion of the minimum wage since 2000. This valorization has contributed
meaningfully to income growth among less-qualified workers (Saboia;
Hallak, 2016).

Katovich & Maia
3 Data and methodology
3.1 Data sources
Sectoral labor productivity in Brazil is computed as the quotient of Gross

Value Added (GVA) to total hours worked for each sector. Annual data on
sectoral Gross Value Added (GVA) are drawn from the National Accounts,
presented by the Instituto Brasileiro de Geografia e Estatística (IBGE). IBGE
reports GVA for twelve sectors: 1) Agriculture, 2) Extractive Industry, 3)
Manufacturing, 4) Electricity, Gas, Water, and Sewage, 5) Construction, 6)
Commerce, 7) Transportation, Storage, and Mail, 8) Information Services,
9) Financial Services, 10) Real Estate, 11) Other Services, and 12) Public Ad-
ministration, Health, Education, and Social Security. We combine sectors
2 and 3, sectors 4 and 5, sectors 8 and 9, and sectors 10 and 11 in order to
reduce the influence of extreme outliers and to make data trends visually
comparable while preserving the conceptual integrity of each sector to the
greatest degree possible.1 The resulting eight aggregated sectors employed
throughout this study are: 1) Agriculture, 2) Industry (Manufacturing and
Extractive), 3) Construction and Utilities, 4) Commerce, 5) Transportation,
Storage, and Distribution, 6) Financial and Information Services, 7) Real
Estate and Other Services, and 8) Public Administration, Health, Educa-
tion, and Social Security.
Data on total hours worked per sector, as well as a range of additional
variables employed in our analysis, are drawn from the Pesquisa Nacional
por Amostra de Domicílios (PNAD), sponsored by IBGE. Data are pooled over
the years 1996 to 2014. Data from Brazil’s Northern region are excluded
1 Specifically, labor productivity for extractive industries and real estate is extremely high
relative to negligible levels of employment in those sectors. Extractive industries employed
just 0.4% of workers in 2014 (and just 3.47% of total industrial workers), but displayed an
average labor productivity value of US$116.4 per hour for that year, over four times higher
than the next most productive sector. Likewise, real estate employed only 1.1% of workers
in 2014, and displayed a labor productivity value of US$116.0 per hour for that year. For
comparative purposes, we merged these sectors with manufacturing and other services, re-
spectively. The elevated value-added per labor hour in extractive industry is likely the result
of substantial accumulated capital (e.g. mines, drilling platforms) more than of real contribu-
tions of labor in that sector. Thus, presenting extractive industry separately could be mislead-
ing, especially considering the minimal size of extractive industrial employment in the PNAD
sample. Nonetheless, the sector should not be excluded entirely, given its contribution to
national GDP and important interlinkages with advanced areas of Brazilian manufacturing.
In sum, the most computationally and conceptually consistent approach appears to be merg-
ing extractive industry and manufacturing into an aggregated measure of industry.

due to lack of data on rural areas of this region before 2004.2 The four-digit
economic Activity codes from the PNAD were grouped into the eight sec-
tors described above, and incorporate the methodological changes intro-
duced in the Classificação Nacional de Atividades Econômicas (CNAE) after the
year 2000 (Dedecca; Rosandiski, 2003).
Income data from the PNAD were deflated to 2014 constant values us-
ing the Índice Nacional de Preços ao Consumidor, provided by IPEA. GVA
values were deflated to 2014 constant values using the World Bank’s GDP
deflator. Deflated values in Brazilian Reals were then converted to Pur-
chasing Power Parity (PPP) constant 2014 US dollars using data from the
IMF’s 2014 World Economic Outlook report.3 Conversion to US dollars
was intended to facilitate international comparisons.
3.2 Empirical analysis
Sectoral variation in the productivity-wage relationship may be the result

of variation in institutional and market forces among different types of eco-
nomic activities. Alternatively, it may be the result of differences in average
worker characteristics across sectors. To distinguish between these alterna-
tive dynamics, we fit a regression model to pooled annual data from the
PNAD for years 1996-2012.4 The objective is to measure the impact of sec-
toral labor productivity on individual hourly wages. We limit our sample
to working adults between the ages of 15 and 65. The dependent variable
is the natural logarithm of the i-th individual’s labor income per hour (w),
which is assumed to be a function of the i-th individual’s personal character-
istics (vector x), j-th economic sector’s characteristics (z) in the state where
that individual is employed, and national minimum wage (v) in year t:
2 In 2014, the seven excluded states of Brazil’s Northern region (Acre, Amapá, Amazonas,
Pará, Rondônia, Roraima, and Tocantins) hosted only 6.6% of Brazil’s total labor force, sug-
gesting that the exclusion of these states to maintain sample consistency should not signifi-
cantly alter the descriptive power of our results. Also note that the PNAD was not applied in
years 2000 and 2010 corresponding with application of the National Census.
3 Conversion to 2014 Constant US Dollars was made using the Implied PPP Conversion
Rate of 1.7 Brazilian Reals per US Dollar. Conversion rate was obtained from the IMF’s 2014
World Economic Outlook dataset: http://www.imf.org/external/pubs/ft/weo/2015/02/weo-
data/download.aspx.
4 While national-level GVA data are available from IBGE up until 2014, state-level GVA data
are only available until 2012. Thus, data from the 1996-2012 period are pooled for regression
analysis.

Katovich & Maia
(1)
Factor ri captures unobserved regional heterogeneity and is controlled

by fixed effects using 26 binary variables to represent Brazil’s 27 federal
units (UF). The factor ct represents economic, political and/or institu-
tional cycles affecting wages. These cycles are controlled for by 4 binary
variables representing five federal governments over the sample period
(1996-1998: first term of Fernando Henrique Cardoso; 1999-2002: sec-
ond term of Fernando Henrique Cardoso; 2003-2006: first term of Luiz
Inácio Lula da Silva; 2007-2010: second term of Luiz Inácio Lula da Sil-
va; 2011-2014: first term of Dilma Rousseff). εijt is an idiosyncratic error
term. Coefficients β, δ and φ express the net impact of the explanatory
variable on the log of hourly wage. Regression estimates are computed
by Ordinary Least Squares (OLS) with heteroscedasticity consistent
standard errors.
Table 1 Variables and mean values

Variable Description Mean
1996 2014
W Labor income per hour (constant 2014 USD) 5.06 7.00
School Years of education 6.4 9.2
Female Proportion female 0.40 0.45
Non-white Proportion black or indigenous 0.46 0.54
Age Years of age 32.1 35.4
Productivity Labor productivity, by UF (constant 2014 USD) 9.44 10.71
Minwage National monthly min. wage (constant 2014 USD) 199 426
Unionized % of workers unionized, by UF 0.18 0.16
Formal % of workers formalized, by UF 0.59 0.7
Source: PNAD (IBGE).
This is a hierarchical approach, where the minimum wage v only varies

by year (level 1), economic sectors’ characteristics vary by sector/state
and year (z, level 2) and individuals’ characteristics vary for each indi-
vidual i of the sector/state s and year t (x, level 3). In a comparative model,
we replace the variable minimum wage and cycles ct with temporal fixed
effects, using 16 binary variables to represent the 17 years included in the
sample. The intention is to estimate the model under alternative speci-

fications. The set of individuals’ and sectors’ characteristics used in our

analysis is described in Table 1. More detailed descriptive statistics are
presented in Appendix A.
The main advantage of this pooled hierarchical strategy is that it allows
for wider variability of the independent variables. This is particularly im-
portant for structural characteristics, which only vary across sectors (e.g.
productivity), and/or years (e.g. minimum wage). In turn, the main dis-
advantage of the pooled models is that variability may differ across years
(heteroscedasticity), resulting in biased estimates for the standard errors.
This problem was avoided by estimating standard errors robust to het-
eroscedasticity (Wooldridge, 2003, p. 258).
Since explanatory variables in vectors x and z are measured in different
scales, we cannot directly compare coefficients in β or δ in order to identify
variables with the largest impact on w. Consequently, standardized coeffi-
cients were estimated which permit measurement of explanatory variable
effects on w in standard deviation units, rather than in terms of the original
units of x and z (or w). Standard deviation units are the resultant param-
eters when all variables are standardized to a mean of 0 and a variance of
1, and are estimated by (Wooldridge, 2003):
ˆ js (ˆ j / ˆ w )ˆ j (2)
where β̂ j is the OLS estimator, σˆ j is the sample standard deviation for the
j-th explanatory variable, and σˆ w is the sample standard deviation for the
dependent variable ln w.
First, baseline regressions were estimated on all pooled observations
using Equation 1. Baseline regressions establish economy-wide coefficient
parameters for subsequent comparison with sectoral results. Furthermore,
baseline results provide a sensitivity analysis of alternative model speci-
fications (progressively controlling for time (or political-economic cycle)
fixed effects and institutional factors). We next estimate Equation 1 for
each economic sector individually, drawing upon only those observations
that fall into each economic sector, successively. Sectoral results illustrate
variations in the productivity-wage relationship between different eco-
nomic activities.

Katovich & Maia
4 Results
4.1 Productivity and wage trends in Brazil (1996-2014)
Brazil successfully managed to bring its hyperinflationary experience to an

end in 1994 with the Plano Real under the presidency of Fernando Cardo-
so. Nevertheless, the side effect of a series of initiatives to control inflation
and the growing public deficit (such as privatization, reduction of tariff
barriers, and strong valorization of the Real), coupled with simultaneous
international crises in Mexico (1994), Asia (1997), and Russia (1998), led to
an increase in unemployment, stagnation in productivity, and declines in
real wages over this period, as observed in Figure 1 (Dedecca, 2005; Gen-
nari, 2002). Markets balked briefly again in 2002 over the election of Luiz
Inácio Lula da Silva of the Workers Party to the presidency, but growth
soon returned in full force with the international commodity boom of the
2000s. Fueled primarily by China’s explosive growth, international com-
modity prices rose sharply for major Brazilian exports such as iron and
soybeans, improving Brazil’s terms of trade and attracting foreign invest-
ment (Giambiagi, 2011).
From 2003 onwards, Lula’s government capitalized on this commod-
ity boom by facilitating the expansion of consumer credit and fostering
income redistribution through significant real increases in the minimum
wage and spending programs like Bolsa Familia. Unemployment shrank,
the number of formal salaried jobs multiplied, and income inequality and
poverty experienced historic declines (IPEA, 2012). This period was ac-
companied by a rise in real wages that outstripped growth in labor produc-
tivity, as illustrated by the notable rise in real wages relative to productiv-
ity in Figure 1. This development suggests that, for the Brazilian economy
as a whole, rising real wages over the 2003-2013 period may have been
more the result of minimum wage increases and formalization of the labor
market than of structural development toward more productive employ-
ment. This apparent failure to capitalize on the commodity boom of the
2000s to promote structural productivity gains bodes poorly for prospects
of further sustained wage growth in Brazil (Maia; Menezes, 2014).
Finally, the decline in both productivity and wages after 2013, as ob-
served in Figure 1, marks the onset of Brazil’s current economic crisis. The
slowing of China’s commodity boom and the crash in oil prices in 2014

reversed Brazil’s terms of trade, leading to a rising deficit that in turn pro-
voked pro-cyclical austerity measures. These recent dynamics have cor-
responded with declines in real wages and productivity levels.
Figure 1 Brazil: overall labor productivity and wage growth (1996-2014)
18,0
Constant 2014 PPP USD
16,0
14,0
12,0
10,0
8,0
6,0
4,0
2,0
0,0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Labor Productivity Average Wage
Source: Figure constructed by author from PNAD (1996-2014) and National Accounts.
Examining the Brazilian economy on a sectoral level, the wide divergence

in productivity levels among different economic activities becomes clear
(Figure 2).5 For instance, in 1996 an average hour of labor in the lowest-
productivity sector, agriculture, produced US$4.93 in value (in constant
2014 US dollars), while an average hour of labor in the highest productiv-
ity sector, financial and information services, produced US$39.67. From
1996 onwards, these sectoral productivity values display a convergent
tendency, such that the difference between the lowest productivity sector
in 2014 (commerce) and highest (real estate and other services) was only
43% of the difference in 1996.
5 Observing the striking differences in productivity among economic sectors, it is tempting

to think that huge production gains could be realized simply by moving workers from low
productivity to high productivity activities. While this indeed is the long-term objective of
many national development policies, instantaneous productivity gains from activity-switch-
ing are limited because, as noted in Biesebroeck (2015), the values in Figure 2 represent aver-
age productivities, not marginal productivities. Productive sectors are typically productive
because they embody high capital accumulation and complex infrastructures. Thus, adding
an additional worker at the margin will not likely boost overall production by a level com-
mensurate with the average productivity rate of that sector.

Katovich & Maia
Figure 2 Brazil: labor productivity (value added per labor hour)

By economic sector, absolute and relative growth (1996-2014)
45
Constant PPP 2014 USD
40
35
30
25
20
15
10
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Agriculture Industry (Manufacturing and Extractive)
240
Percentage growth (1996=100)
Construction and Public Utilities Commerce

220
Transportation, Storage, Distribution Financial and Information Services
200
Real Estate and Other Services Public Administration, Health, Education,
180
Social Security
160
140
120
100
80
60
40
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Social Security
Source: Figure constructed by author from PNAD (1996-2014).
This convergence is the result of two sectoral developments. The first, the
surprising decline in productivity for Financial and Information Services,
is the combined result of real productivity trends and changing occupa-

tional distributions within the sector. In real terms, the financial services
subsector suffered a 40% productivity loss between 1998 and 2014. This
dynamic could be related to changes in Brazilian banks’ “earnings spread”
between lending and borrowing rates, which fell sharply with the de-
cline in interest rates over this period, bringing value-added down with
it (Freitas; Prates, 2016; Afonso; Köhler; Freitas, 2009).6 Parallel to these
real value-added losses in the financial sector, the activity composition of
the information services subsector evolved toward lower-productivity ac-
tivities such as telemarketing and “other business services.” Employment
in these lower-productivity components of information services grew by
37% over the 1996-2014 period (relative to overall employment growth
of 24%), thus coming to occupy an inflated proportion of total sectoral
employment by 2014 (PNAD, 2016).
The second trend leading to sectoral productivity convergence is the
dramatic rise in agricultural productivity since 1996. Labor productivity
in agriculture (historically Brazil’s lowest productivity sector) grew by
121.7% over the 1996-2014 period, with an annual growth rate of 4.8%.
This rapid growth was the result of a number of interrelated dynamics.
Rural labor shortages incentivized investments in labor-augmenting tech-
nologies, rural workers’ average education levels increased, new trans-
genic seeds boosted yields, and domestic and international research and
extension improved innovation and technology adoption. Overarching
these trends, agribusiness assumed an expanded role in capital-intensive,
monoculture production for export, especially on the newly opened Cer-
rado frontier (Buainain, 2014; Guanziroli, 2014; Maia; Sakamoto, 2012;
Gasques et al, 2014).
Two additional trends should be noted in Figure 2. Firstly, Real Estate and
Other Services’ high levels of “productivity” are misleading, since much of
real estate’s value derives from accumulated capital (past labor embodied
in property). Thus, when dividing the large value gains enjoyed by real es-
tate during Brazil’s sustained property appreciation by the small number of
hours worked in this sector, the resulting labor productivity values appear
surprisingly high. These values should be treated with due caution.
6 Value-added in the financial services sector is imputed directly from the spread between
lending rates and interest rates. Thus, when annual interest rates declined from 34.2% at the
beginning of 1998 to 17.7% at the end of 2004, financial spreads declined in parallel, reducing
financial sector “productivity” (Banco do Brasil, Histórico das taxas de juros, 2016: https://www.
bcb.gov.br/Pec/Copom/Port/taxaSelic.asp).

Katovich & Maia
Figure 3 Brazil: monthly labor income

By economic sector, absolute and relative growth (1996-2014)
2000
Constant PPP 2014 USD
1800
1600
1400
1200
800
600
400
200
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
150
Percentage growth (1996=100)

140
130
120
Social Security
110
100
90
80
70
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

Social Security
Source: Figure constructed by author from PNAD (1996-2014).
With the exception of public employment, real wages declined across

all sectors throughout the late 1990s and early 2000s. The year 2003 ap-
pears to be an inflection point, at which all sectors reverse negative in-
come trends and begin enjoying real income gains, which are sustained
until 2013. Over the 1996-2014 period, agriculture exhibits the strongest

income gains (37.1% total increase), and financial and information services
exhibit the greatest losses (9.3% total decrease) (Figure 3).7
Wages for most sectors roughly follow productivity trends for the
corresponding sector, with three noteworthy exceptions. Firstly, despite
monotonic declines in productivity in the financial and information ser-
vices sector, wages for this sector nevertheless pick up after 2003, suggest-
ing a rise in the relative wage (an increasing share of average value-added
going to wages). This divergence may be the result of the information
asymmetries and bargaining power dynamics described above. Financial
and information services jobs are more likely to be career-track, and thus
subject to the type of seniority-biased incentive structuring identified as a
potential source of wage-productivity divergence by Biesebroeck (2015).
Furthermore, jobs in this sector require higher education levels, potential-
ly allowing educated workers (still relatively scarce in the Brazilian labor
market) to exert greater bargaining power over employers.8 Finally, despite
the erosion of union power in the financial sector throughout the 1990s
and early 2000s, labor organization in this sector remains high relative to
other areas, further improving workers’ bargaining power and driving up
relative wage (PNAD, 2016).
In the second incidence of productivity-wage divergence, public em-
ployees’ wages realize a total increase of 30.1% between 1996 and 2014,
despite total productivity growth of only 6.9% over this period. It is im-
portant to note that productivity in the public sector must be interpreted
carefully. Because output in the government sector is measured as equal to
the total value of inputs, the appreciation of relative wages in the public
sector indicates only that salaries constitute a higher share of total costs
in the sector, not that public workers are necessarily retaining a greater
proportion of their value-added (Boyle, 2006). Alternatively, this apprecia-
7 One should note that these data represent sectoral aggregates, and may hide divergent
trends within individual sectors. For instance, the strong increase in median agricultural wag-
es over the 1996-2014 period disguises growing inequality within this sector. Those agricul-
tural workers inserted into modern agricultural practices in core production regions enjoyed
significant wage gains, while smaller producers in less developed regions saw much smaller
gains or real losses (Maia and Sakamoto, 2014). In industry, declining sector-wide productiv-
ity levels hide booming productivity gains in extractive industries.
8 This disproportional compensation for highly qualified workers parallels similar trends in
the United States, identified as “skill-biased technological progress”, whereby disequilibrium
between the supply and demand of highly qualified workers has led to enormous compensa-
tion gains in knowledge-intensive sectors (Autor, 2010).

Katovich & Maia
tion of the relative wage may indeed be a consequence of the significant

bargaining power imparted on public employees by institutional protec-
tions and benefits, high levels of labor organization, and the relatively high
education levels of these workers.
In the third notable instance of productivity-wage divergence, the
low wage-levels of workers in the real estate and other services sector
illustrates the extent to which value added per hour in this sector, as dis-
played in Figure 2, is in fact constituted by property rents rather than true
labor productivity.
In sum, sectoral labor productivity and real wages both evolved in sig-
nificant ways over the 1996 to 2014 period. To what degree were these
developments related? Did gains in productivity drive gains in wages, as
neoclassical labor economics would predict, or were institutional and/or
personal worker characteristics more determinative of earnings levels? In
order to disentangle these alternative scenarios, estimates of micro-level
wage equations are presented in the following section.
4.2 Impacts of sectoral productivity on wages
We first estimate alternative baseline specifications (Equation 1), and re-

port results in Table 2. All model specifications fit relatively well to the
PNAD pooled sample, with coefficients of determination above 46%.
Standard errors are robust to heteroscedasticity and estimates are stable
and significant over multiple specifications.
Signs and magnitudes of control variables are as expected from the lit-
erature. The coefficient of 0.089 for schooling in Model 3 indicates that a
one-year increase in an employed individual’s years of schooling, all else
equal, is associated with a 9.3% (e0.089 – 1 = 0.092) increase in hourly earn-
ings. The coefficient of –0.274 for female indicates that, all else equal, wom-
en’s average hourly wages are 24.0% (e–0.274 – 1 = –0.240) lower than men’s,
indicating extensive gender inequalities in the Brazilian labor market.
The coefficient of –0.114 for non-white indicates that, all else equal, black
and indigenous workers present an average hourly wage that is 10.8%
(e–0.114 – 1 = –0.108) lower than white and Asian workers, indicating the
presence of strong racial inequalities in employment. The positive coef-
ficient estimates for age and negative estimates for age2 indicates an invert-

ed-U relation between wages and working experience9.

The coefficient estimates of productivity, 0.123 in Models 1 and 2, indi-
cate that a 1% increase in each observed worker’s state- and activity-spe-
cific labor productivity is associated with a 0.123% increase in real hourly
wages for the average worker. This impact increases only slightly when
we control for unionization and formal employment in Model 3 (0.166%).
While positive and significant, this elasticity appears to be low by interna-
tional standards (Peeters; Den Reijer, 2011).
Table 2 Baseline regression estimates for the dependent variable ln of hourly wage
Variable Beta Standardized Beta
Model 1 Model 2 Model 3 Model 1 Model 2 Model 3
School *** 0.099 *** 0.099 *** 0.089 *** 0.504 *** 0.504 *** 0.451
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Age *** 0.072 *** 0.072 *** 0.070 *** 0.999 *** 0.998 *** 0.974
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Age 2
*** -0.001 *** -0.001 *** -0.001 *** -0.727 *** -0.726 *** -0.704
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Female *** -0.311 *** -0.311 *** -0.274 *** -0.185 *** -0.185 *** -0.163
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
Non-white *** -0.123 *** -0.123 *** -0.114 *** -0.074 *** -0.074 *** -0.068
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
ln productivity *** 0.123 *** 0.123 *** 0.166 *** 0.091 *** 0.091 *** 0.122
(0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
ln minwage *** 0.251 *** 0.238 *** 0.070 *** 0.066
(0.009) (0.009) (0.009) (0.009)
Unionized *** 1.019 *** 0.098
(0.012) (0.012)
Formal *** 0.394 *** 0.089
(0.006) (0.006)
UF *** FE *** FE *** FE *** FE *** FE *** FE
Year *** FE *** FE
Cycle *** FE *** FE *** FE *** FE
Constant -1.138 -2.615 -2.854
(0.009) (0.056) (0.055)
(continues on next page)
9 Age is employed throughout this analysis as a proxy for working experience.

Katovich & Maia
Table 2 (continued)
Variable Beta Standardized Beta
Model 1 Model 2 Model 3 Model 1 Model 2 Model 3
N 1,208,080 1,208,080 1,208,080 1,208,080 1,208,080 1,208,080
Adjusted R 2
0.461 0.461 0.479 0.461 0.461 0.479
F 16,933 21,958 22,660 16,933 21,958 22,660
Heteroskedasticity Robust Standard Errors are Presented in Parentheses.

+
= Significant at 10%; * = Significant at 5%; ** Significant at 1%; *** Significant at 0.1%.
FE Indicates Control of Fixed Effects using Dummy Variables.
Institutional factors also play a significant role in determining wage levels.

The coefficient value of minimum wage, 0.251 in Model 2 (0.238 in Model 3),
indicates that a 1% increase in the national real minimum wage is associated
with a 0.251% increase in real wages (0.238% in Model 3). The coefficient
value of 1.019 for union in Model 3 indicates that a 1 percentage point in-
crease in the proportion of organized workers in an observed worker’s state
is associated with a 1.019% increase in real wages for that worker, all else
equal. Finally, the coefficient of 0.394 for formal indicates that a 1 percentage
point increase in the proportion of formalized workers in an observed work-
er’s state is associated with a 0.394% increase in real wages for that worker.
Estimates for the standardized coefficients allow us to understand to
what extent relative change (one standard deviation) in an explanatory
variable affects relative variation in the dependent variable. The similar
estimates for log of productivity (0.122), unionized (0.098), and formal (0.089)
suggest that real wages were equally affected by both relative variations
in labor productivity and institutional factors. This finding suggests that
remuneration in the Brazilian labor market (both absolutely and relatively
between sectors) is not merely determined by market-driven forces such
as labor productivity, but also by structural characteristics, many of which
are activity-specific. The association between relative changes in the mini-
mum wage and in the hourly wage is slightly lower (0.066), but this result
may hide important differences between labor- and capital-intensive sec-
tors. Thus, we next estimate sectoral regressions in order to assess the
activity-specific nature of wage-determinants.
Table 3 reports sectoral regression results, generated by fitting the
wage-regression model developed above to seven pooled datasets, each
of which include only individuals employed in the respective economic

sector.10 Standard errors are robust to heteroscedasticity, and estimates,

with some exceptions, are significant at the 1% level. Estimates for the
standardized coefficients are presented in Appendix C.
Signs and magnitudes of social control variables are again as expected,
though there is notable sectoral variation. Results indicate that returns to
schooling are higher than the baseline average in financial and information
services (e0.131 – 1 = 14,0% per year of education), and public administration
and services (e0.119 – 1 = 12.7%). Returns to formal education are lowest in ag-
riculture (e0.043 – 1 = 4.4%) and real estate and other services (e0.054 – 1 = 5.5%).11
These results indicate that returns to education are higher in more skill-
intensive sectors, suggesting the presence of skill-biased technological
change and job polarization (increasing separation between high- and
low-paying activities) as potential generators of both wage differentiation
and persistent inequality among sectors (Berman et al., 1997; Autor, 2010).
Table 3 Sectoral regression estimates for the dependent variable log of hourly wage
Agricul- Industry Construc- Commerce Financial Real Estate Public
Variable ture tion & & Info & Other Services
Utilities Services Services
School ***0.043 ***0.095 ***0.084 ***0.076 ***0.131 ***0.054 ***0.119

(0.001) (0.000) (0.001) (0.001) (0.001) (0.000) (0.001)
Age ***0.043 ***0.080 ***0.069 ***0.075 ***0.085 ***0.060 ***0.051
(0.001) (0.001) (0.001) (0.001) (0.002) (0.001) (0.001)
Age 2
***-0.001 ***-0.001 ***-0.001 ***-0.001 ***-0.001 ***-0.001 ***-0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Female ***-0.201 ***-0.351 *-0.019 ***-0.226 ***-0.255 ***-0.324 ***-0.289
(0.006) (0.003) (0.010) (0.003) (0.005) (0.003) (0.004)
Non-white ***-0.060 ***-0.124 ***-0.124 ***-0.112 ***-0.169 ***-0.072 ***-0.128
(0.004) (0.003) (0.005) (0.003) (0.006) (0.003) (0.004)
ln productivity 0.003 ***0.148 ***0.091 ***0.201 ***0.095 ***0.342 ***0.192
(0.005) (0.004) (0.005) (0.004) (0.008) (0.004) (0.006)
(continues on next page)
10 Transportation is excluded from Table 3 due to the absence of state-level value-added

data for this sector.
11 It is noteworthy that many skilled workers in sectors such as agriculture and construction
gain qualifications through on-the-job training and apprenticeships rather than formal educa-
tion. Thus, low estimates of returns to schooling in these sectors should not be interpreted as
non-responsiveness of wages to skills or qualifications.

Katovich & Maia
Table 3 (continued)
Agricul- Industry Construc- Commerce Financial Real Estate Public
Variable ture tion & & Info & Other Services
ln minwage ***0.496 ***0.100 ***0.218 ***0.269 *0.081 ***0.460 ***0.200

(0.026) (0.020) (0.034) (0.021) (0.039) (0.019) (0.027)
Unionized ***-0.301 -0.006 ***0.378 ***-0.336 ***0.292 0.115 ***0.628
(0.055) (0.046) (0.082) (0.061) (0.079) (0.095) (0.063)
Formal ***0.643 ***0.527 ***0.343 ***0.458 **0.208 ***0.214
(0.038) (0.048) (0.051) (0.057) (0.075) (0.049)
UF ***FE ***FE ***FE ***FE ***FE ***FE ***FE
Cycle ***FE ***FE ***FE ***FE ***FE ***FE ***FE
Constant ***-3.310 ***-1.994 ***-2.246 ***-2.997 ***-1.848 ***-4.385 ***-2.314
(0.152) (0.120) (0.197) (0.121) (0.236) (0.111) (0.162)
N 115,631 233,268 95,621 213,266 88,555 307,125 154,614
Adjusted R2 0.321 0.475 0.408 0.378 0.479 0.366 0.444
F 1,497 4,108 1,263 2,592 1,687 3,980 2,867

+
= Significant at 10%; * = Significant at 5%; ** Significant at 1%; *** Significa at 0.1%.
FE Indicates Control of Fixed Effects Related to Year or State Dummy Variables.
The gender wage-penalty varies significantly by sector. The negative wage

impact of being female is greatest in industry (e–0.351 – 1 = –29.6%) and real
estate and other services (e–0.324 – 1 = –27.6%), and smallest in construction
(e–0.019 – 1 = –1.9%) and agriculture (e–0.201 – 1 = –18.2%). The effects of race
on wages appear to be more robust and consistent over economic sec-
tors. Race-related wage penalties range from a minimum impact of –5.8%
for non-whites in agriculture, to a maximum impact of –15.5% for non-
whites in Financial & Information Services.
The variable of focus in this study, log of productivity, exhibits significant
variation over economic sectors, though its impact is universally posi-
tive. All else equal, a 1% increase in the level of labor productivity in an
observed worker’s state and economic sector has the largest positive im-
pact on real wages in real estate and other services (+0.34%), commerce
(+0.20%), public services (+0.19%), and industry (+0.15%). Productivity
has lower impact on wages in financial and information services (+0.10%),
construction and utilities (+0.09%), and agriculture (insignificant).

The relatively large positive impacts measured in real estate and com-
merce may be due to the prevalence of work-on-commission in these sec-
tors. Many workers earn according to their sales performance, and should
thus exhibit high levels of association between labor productivity and earn-
ings. The relatively large impact of labor productivity on wages in the public
sector is likely the result of labor productivity accounting methods. As noted
before, public sector workers’ value-added is calculated directly from inputs,
thus eliciting a positive association between productivity and wages. The la-
bor productivity-wage relationship is potentially relatively low in the finan-
cial and information services sector due to information asymmetries inher-
ent to these activities. In banking, marketing, research, and other activities
in this sector, firms find it difficult to assess employees’ true productivity
levels. In contrast, productivity impacts on wages in industry are relatively
high due, presumably, to the facility with which firms can measure employ-
ees’ productivity and by the degree to which employers regulate employees
through employment contracts (Rose; O’Reilly, 1998). Finally, the impacts
of labor productivity on wages are smallest in construction and agriculture.
This may be due in part to the generally low levels of worker qualifica-
tion and the substantial influence of institutional variables such as minimum
wage in these sectors. It is important to note that agriculture exhibits espe-
cially high levels of heterogeneity in firm and worker productivity, causing
low sector-level elasticity to obscure noteworthy real productivity and wage
gains among modern agricultural practices (Maia; Sakamoto, 2014).
Institutional variables also exert strong and significant effects on real
wages at the sectoral level. Results indicate that a 1 percentage point in-
crease in union participation in an observed worker’s state is significantly
negatively associated with real wages in agriculture (–0.30%) and com-
merce (–0.34%), and significantly positively associated with real wages in
public services (+0.63%), construction & utilities services (+0.38%) and
financial and information services (+0.29%). This divergent behavior may
reflect divergent levels of labor organization across sectors. For example,
agriculture and commerce are characterized by low levels of labor organi-
zation (14% and 15% respectively in 2014), while financial and informa-
tion services and public services are characterized by high levels of labor
organization (25% and 27%, respectively).12 Furthermore, financial and
12 These data refer only to employees, and exclude self-employed workers. Since rates of
self-employment are much higher in agriculture and commerce than in public services or

Katovich & Maia
information services and public services are characterized by higher barri-

ers to entry, high-skilled (difficult to replace) jobs, and institutional protec-
tions that facilitate labor organization and action (IPEA, 2009).
As a result, an increase in labor organization in unorganized sectors
(agriculture and commerce) may have the effect of pulling resources away
from the large majority of non-organized workers, thus resulting in the
negative coefficient reported in Table 3. In organized sectors (financial and
information services and public services), an increase in labor organization
benefits a large enough proportion of workers to pull up sectoral wages as
a whole, resulting in the positive coefficient measured for these sectors.
The impacts of formal (measuring the proportion of formalized workers
in each state) are significant and positive across all sectors.13 Since worker
formalization primarily impacts labor markets by requiring firms to pay
minimum wage, this variable should exhibit the largest impact on sectors
characterized by high proportions of minimum-wage employment, i.e.
sectors with low average wages. Indeed, results in Table 3 indicate that a
1 percentage point increase in state-level formalization is associated with
the largest wage gains (+0.64%) in agriculture, which presents the lowest
wage levels of any economic sector, and the smallest wage gains (+0.21%)
in real estate and other services and financial and information services, the
latter of which presents the highest wage levels of any economic sector.
Despite low average wages in real estate and other services, the net impact
of formalization on wages in this sector is likely low due to high within-
sector heterogeneity–ranging from extremely high wage activities, such as
real estate, to low wage activities, such as cleaning and security services.
The substantial increases of the minimum wage over the sample period
primarily favored low-wage sectors: agriculture and real estate and other
services. For each 1% variation in the minimum wage, average wages in
these sectors increased by 0.50% and 0.46%, respectively. In turn, the im-
pact of minimum wage on high-skill jobs, such as in financial and informa-
financial and information services, the true contrast in levels of labor organization between
the former and latter sectors is even larger than the quoted statistics suggest. Furthermore,
to avoid overgeneralization, it should be noted that some specific subsectors in construction
and utilities are also characterized by high levels of unionization, namely, production and
provision of electric energy and water (41%).
13 Formally employed public sector workers do not possess a “carteira assinada” (formal em-
ployment registration) certifying their formal employment status. They thus appear among
informal workers in the PNAD sample. To avoid misestimation based on this misleading clas-
sification, the variable formal was dropped from the public services sectoral regression model.

tion services, are negligible.

Overall, the standardized coefficients in Appendix C highlight that la-
bor productivity has played an important role in increasing hourly wages.
Relative changes in labor productivity exerted larger effects on average
wages in sectors characterized by productivity-based pay, i.e. commerce
and real estate and other services. Nevertheless, institutional factors such
as minimum wage also significantly explain the dynamics of average wag-
es in Brazil, especially in low-paying sectors. Relative variation in the min-
imum wage exerted the largest impact on hourly wages in agriculture, real
estate and other services, commerce, and construction and other utilities.
5 Conclusions
Real wages may diverge from labor productivity due to a range of eco-
nomic and institutional factors. Economic factors include changes in non-
pay compensation, information asymmetries between workers and firms,
the emergence of worker or firm rents as the result of labor market dis-
equilibrium and search costs, and technology-biased innovation and in-
vestment that distorts factor income shares. Institutional factors include
labor market formalization, labor organization, and minimum wages. The
degree to which these factors cause wage growth to diverge from produc-
tivity growth has significant implications for economic competitiveness,
investment, and the distribution of income among factors of production.
In Brazil, real wages grew significantly more than did labor productiv-
ity between 1996 and 2014. However, this general trend disguises signifi-
cant sectoral variations, which can be grouped into four conceptual trends.
Firstly, in the agriculture and commerce sectors, large gains in labor pro-
ductivity were accompanied by real wage increases and improvements
in the quality of employment. This dynamic was likely due to a positive
interplay between productivity-enhancing market developments (incor-
poration of new technologies, high levels of investment, exploitation of
new consumer markets/agricultural frontiers) and income-enhancing in-
stitutional developments (formalization and minimum wage valorization).
In conjunction, these forces resulted in productivity gains that outpaced
wage growth, leading to declining relative wages in agriculture and com-
merce (see Appendix A for data on relative wages).

Katovich & Maia
In a second sectoral trend, the construction and real estate and other
services sectors enjoyed real wage gains over the 1996-2014 period, de-
spite stagnation in labor productivity. Both sectors offer little natural room
for drastic productivity growth through the incorporation of new tech-
nologies, investments, or practices. And both were major beneficiaries of
institutional interventions such as formalization and valorization of the
minimum wage.14 Together, these forces resulted in a sharp rise in relative
wage for construction and real estate and other services.
In a third variation of the productivity-wage relationship, both labor
productivity and real wages largely stagnated or declined slightly in the
industry and transportation sectors. In the case of industry, international
competition likely held down wages, while productivity suffered from
ongoing processes of deindustrialization. By its nature, the transportation
sector offers little room for major productivity gains, while the average
wage may have fallen as a result of changing forms of employment re-
lations (i.e., increasing levels of self-employment) and increasing relative
costs of transport (Chahad; Cacciamali, 2005). These dynamics explain the
moderate decline in relative wages for industry and transportation.
In a fourth and final trend, the financial and information services and
public services sectors saw stable or declining levels of labor productivity,
accompanied by increasing or stable real wages. Productivity declines in fi-
nancial and information services were due largely to changes in the Brazilian
banking system over the 1998-2004 period. Earnings increases in both sec-
tors may have resulted from persistently high returns to education, growing
demand for qualified workers, and high levels of labor organization. As a re-
sult, the relative wage rose sharply for these sectors between 1996 and 2014.
It is important to note that all analyses above should be interpreted
with caution, due to the difficulty inherent in estimating absolute values
of labor productivity for some sectors, particularly public services and real
estate. Nevertheless, the values serve to elucidate temporal dynamics of
labor productivity within (if not necessarily across) sectors, revealing es-
sential patterns in the productivity-wage relationship.
Estimation of hierarchical wage models using pooled data assessed the
main structural and individual determinants of real wages over the sample
period. Growth in sector- and state- level labor productivity was signifi-
14 The Real Estate and Other Services sector includes domestic maid services, a large mini-
mum-wage employment sector in Brazil.

cantly positively associated with growth in real wages for all economic
sectors from 1996 to 2012. Elasticity between labor productivity and real
wages was greatest for sectors where workers’ earnings are often based
directly on productivity (real estate, commerce), or where firms can eas-
ily measure employees’ productivity (industry). Elasticities appear smaller
in sectors where productivity is more difficult for firms to measure, or
where there are high levels of minimum wage employment (agriculture,
construction) or labor organization (financial and information services).
In general, productivity’s impact on wages was comparable to the im-
pacts of institutional factors, particularly worker formalization and mini-
mum wage. Formalization, which primarily impacts labor markets through
the enforcement of a minimum wage-floor, exhibited the largest impacts
on sectors with high proportions of minimum wage employment. Labor
organization had varied effects on wage levels. In sectors with high levels of
organization, increases in union-participation exhibited a significantly posi-
tive association with wages. In contrast, increases in union-participation in
less-organized sectors were negatively associated with wages, perhaps be-
cause union activity served to draw earnings away from the larger share of
non-unionized workers. Nonetheless, unionization changed little over the
sample period and exerted a relatively small impact on hourly wages.
Wage growth in line with the first sectoral trend (observed in the agricul-
ture and commerce sectors) may be the most sustainable in the long term,
in the sense that increased earnings over the 1996 to 2014 period accom-
panied real gains in labor productivity. In contrast, rising relative wages in
the financial and information services and public services sectors highlight
the capacity of labor organization, institutional protections, and skill-biased
job polarization to decouple wages from productivity levels. In sum, insti-
tutional mechanisms display the capacity to substantially reallocate factor
incomes toward workers, but these mechanisms face natural limitations if
not accompanied by growth in labor productivity. Thus, sustainable future
wage growth in Brazil will likely depend on positive interplays between
market-driven productivity gains and continued institutional interventions.
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About the authors

Erik S. Katovich - [email protected]
University of Wisconsin-Madison, Madison, Wisconsin.
Alexandre Gori Maia - [email protected]
Universidade de Campinas, Campinas, São Paulo.
Research for this paper was made possible by generous funding from the Fulbright US Student Program, and by the
hospitality of the Instituto de Economia at the Universidade Estadual de Campinas.
About the article

Submission received on February 21, 2017. Approved for publication on December 06, 2017.

APPENDIX A
Table A1 Labor market developments in Brazil, by sector (1996-2014)

1996 2002 2008 2014 Total
Change
Value Added Agriculture 93,524 122,082 130,301 149,858 56,335
(Millions Industry (Manufacturing & Extractive) 269,853 314,074 490,071 443,091 173,237
of Constant
Construction and Public Utilities 168,301 187,505 168,449 244,655 76,354
2014 PPP US$)
Commerce 137,260 147,132 295,463 371,897 234,637
Transportation, Storage, Distribution 55,159 69,914 95,866 126,776 71,618
Financial and Information Services 208,848 231,751 261,838 285,407 76,559
Real Estate and Other Services 504,855 516,306 568,914 761,220 256,365
Public Services 276,916 313,595 398,302 486,469 209,553
Labor Agriculture 4.93 6.64 7.77 10.93 6.00
Productivity Industry (Manufacturing & Extractive) 13.16 14.63 18.66 18.71 5.54
(Value Added
Construction and Public Utilities 16.52 15.19 11.68 13.82 -2.70
per Labor Hour)
(Constant Commerce 6.62 5.59 9.74 11.17 4.56
2014 PPP US$) Transportation, Storage, Distribution 9.22 9.06 10.76 12.56 3.34
Financial and Information Services 39.67 31.25 24.92 23.53 -16.14
Real Estate and Other Services 23.82 20.37 20.20 26.14 2.32
Public Services 18.23 17.04 18.59 19.49 1.26
Average Agriculture 2.61 2.18 2.73 4.26 1.65
Hourly Wage Industry (Manufacturing & Extractive) 4.98 4.24 4.77 6.33 1.35
(Constant
Construction and Public Utilities 4.40 3.64 3.97 6.08 1.68
2014 PPP US$)
Commerce 5.28 4.19 4.52 5.84 0.56
Transportation, Storage, Distribution 5.92 4.77 5.51 6.95 1.03
Financial and Information Services 11.72 9.54 8.75 11.64 -0.07
Public Services 8.06 7.80 8.71 11.44 3.38
Average Agriculture 453 395 468 621 168.03
Monthly Wage Industry (Manufacturing & Extractive) 905 755 817 990 84.39
(Constant
Construction and Public Utilities 784 652 711 925 140.99
2014 PPP US$)
Commerce 908 744 799 913 5.47
Transportation, Storage, Distribution 1,138 910 975 1,082 -56.11
Financial and Information Services 1865 1542 1424 1691 -173.71
Real Estate and Other Services 541 451 509 667 126.12
Public Services 1,149 1,126 1,257 1,495 346.00

Katovich & Maia
Table a1 (continued)
1996 2002 2008 2014 Total
Change
Proportion of Agriculture 21.5 19.0 16.6 13.9 -7.6
Total Workers Industry (Manufacturing & Extractive) 14.1 13.2 13.8 11.9 -2.2
(%)
Commerce 16.9 17.7 17.8 18.5 1.6
Financial and Information Services 4.3 5.0 6.1 6.6 2.3
Public Services 14.2 14.6 14.7 16.0 1.9
Average Years Agriculture 2.6 3.0 4.0 5.0 2.3
of Schooling Industry (Manufacturing & Extractive) 6.6 7.5 8.5 9.2 2.6
Commerce 7.2 7.9 8.8 9.4 2.2
Public Services 10.1 10.8 11.6 12.2 2.2
Total Hours Agriculture 18,967 18,394 16,776 13,711 -5,256
Worked Industry (Manufacturing & Extractive) 20,500 21,474 26,268 23,685 3,184
(Millions of
Construction and Public Utilities 10,185 12,347 14,421 17,701 7,516
Hours)
Commerce 20,737 26,333 30,325 33,280 12,543
Transportation, Storage, Distribution 5,980 7,713 8,911 10,091 4,112
Financial and Information Services 5,265 7,415 10,507 12,129 6,864
Real Estate and Other Services 21,193 25,346 28,164 29,121 7,928
Public Services 15,194 18,401 21,420 24,962 9,768
Relative Wage Agriculture 0.53 0.33 0.35 0.39 -0.14
(Avg. Hourly Industry (Manufacturing & Extractive) 0.38 0.29 0.26 0.34 -0.04
Wage / Avg.
Value Added
per Labor Hour) Commerce 0.80 0.75 0.46 0.52 -0.27
Transportation, Storage, Distribution 0.64 0.53 0.51 0.55 -0.09
Public Services 0.44 0.46 0.47 0.59 0.14
Source: Table constructed by author from PNAD and National Accounts (1996-2014).

APPENDIX B
Table A2 Brazil: percentage growth, by sector (1996-2014)

Sector Percentage Growth (1996-2014)
GVA Labor Monthly Relative
Productivity Income Wage
Agriculture 60 122 37 -26
Industry
(Manufacturing 64 42 9 -11
and Extractive)
Construction
45 -16 18 65
and Public Utilities
Commerce 171 69 1 -34
Transportation,
130 36 -5 -14
Storage, Distribution
Financial and
37 -41 -9 68
Information Services
Real Estate and
51 10 23 35
Other Services
Public Services 76 7 30 33
Source: Table constructed by author from PNAD and National Accounts (1996-2014).

Katovich & Maia
APPENDIX C
Table A3 Standardized coefficient estimates for dep. variable log of hourly wage,
by sector
Variable Agricul- Industry Construc- Commerce Financial Real Estate Public
ture tion & & Info & Other Services
School ***0.211 ***0.459 ***0.442 ***0.363 ***0.484 ***0.270 ***0.554

(0.001) (0.000) (0.001) (0.001) (0.001) (0.000) (0.001)
Age ***0.828 ***1.116 ***1.066 ***1.128 ***1.008 ***0.952 ***0.684
(0.001) (0.001) (0.001) (0.001) (0.002) (0.001) (0.001)
Age2 ***-0.7160 ***-0.7879 ***-0.7471 ***-0.8100 ***-0.6597 ***-0.7402 ***-0.4053
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Female ***-0.097 ***-0.203 *-0.006 ***-0.157 ***-0.142 ***-0.193 ***-0.160
(0.006) (0.003) (0.020) (0.003) (0.005) (0.003) (0.004)
Non-white ***-0.043 ***-0.078 ***-0.080 ***-0.078 ***-0.088 ***-0.048 ***-0.074
(0.004) (0.003) (0.005) (0.003) (0.006) (0.003) (0.004)
ln productivity 0.003 ***0.084 ***0.067 ***0.103 ***0.055 ***0.216 ***0.109
(0.005) (0.004) (0.005) (0.004) (0.008) (0.004) (0.006)
ln minwage ***0.173 ***0.030 ***0.068 ***0.087 *0.021 ***0.140 ***0.055
(0.026) (0.020) (0.034) (0.021) (0.039) (0.019) (0.027)
Unionized ***-0.032 0.000 ***0.018 ***-0.017 ***0.016 0.003 ***0.036
(0.055) (0.046) (0.082) (0.061) (0.079) (0.095) (0.063)
Formal ***0.173 ***0.061 ***0.040 ***0.055 **0.014 ***0.029
(0.038) (0.048) (0.051) (0.057) (0.075) (0.049)
UF ***FE ***FE ***FE ***FE ***FE ***FE ***FE
Cycle ***FE ***FE ***FE ***FE ***FE ***FE ***FE
N 115,631 233,268 95,621 213,266 88,555 307,125 154,614
Adjusted R 2
0.321 0.475 0.408 0.378 0.479 0.366 0.444
F 1,497 4,108 1,263 2,592 1,687 3,980 2,867

+
= Significant at 10%; * = Significant at 5%; ** Significant at 1%; *** Significant at 0.1%.
FE Indicates Control of Fixed Effects Related to presidential periods or State Dummy Variables.
38 Nova Economia� v.28 n.1 2018 This article is licensed under a Creative Commons Attribution 4.0 International License.

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DOI: http://dx.doi.org/10.

The relation between labor productivity and

Erik S. Katovich (1)

v.28 n.1 p.7-38 2018 Nova Economia� 7

Labor productivity, understood as the value of output produced per unit

8 Nova Economia� v.28 n.1 2018

2 Theoretical interpretations of productivity-wage

According to neoclassical labor economics, a worker’s wage equates to

v.28 n.1 2018 Nova Economia� 9

the assumption of diminishing marginal returns). A market wage greater

10 Nova Economia� v.28 n.1 2018

v.28 n.1 2018 Nova Economia� 11

3 Data and methodology

3.1 Data sources

Sectoral labor productivity in Brazil is computed as the quotient of Gross

12 Nova Economia� v.28 n.1 2018

3.2 Empirical analysis

Sectoral variation in the productivity-wage relationship may be the result

v.28 n.1 2018 Nova Economia� 13

Factor ri captures unobserved regional heterogeneity and is controlled

Table 1 Variables and mean values

Source: PNAD (IBGE).

This is a hierarchical approach, where the minimum wage v only varies

14 Nova Economia� v.28 n.1 2018

fications. The set of individuals’ and sectors’ characteristics used in our

ˆ js  (ˆ j / ˆ w )ˆ j (2)

v.28 n.1 2018 Nova Economia� 15

4.1 Productivity and wage trends in Brazil (1996-2014)

Brazil successfully managed to bring its hyperinflationary experience to an

16 Nova Economia� v.28 n.1 2018

Figure 1 Brazil: overall labor productivity and wage growth (1996-2014)

Examining the Brazilian economy on a sectoral level, the wide divergence

5 Observing the striking differences in productivity among economic sectors, it is tempting

v.28 n.1 2018 Nova Economia� 17

Figure 2 Brazil: labor productivity (value added per labor hour)

Construction and Public Utilities Commerce

Agriculture Industry (Manufacturing and Extractive)

Source: Figure constructed by author from PNAD (1996-2014).

18 Nova Economia� v.28 n.1 2018

v.28 n.1 2018 Nova Economia� 19

Figure 3 Brazil: monthly labor income

Construction and Public Utilities Commerce

Agriculture Industry (Manufacturing and Extractive)

Source: Figure constructed by author from PNAD (1996-2014).

With the exception of public employment, real wages declined across

20 Nova Economia� v.28 n.1 2018

v.28 n.1 2018 Nova Economia� 21

tion of the relative wage may indeed be a consequence of the significant

4.2 Impacts of sectoral productivity on wages

We first estimate alternative baseline specifications (Equation 1), and re-

22 Nova Economia� v.28 n.1 2018

ed-U relation between wages and working experience9.

v.28 n.1 2018 Nova Economia� 23

Heteroskedasticity Robust Standard Errors are Presented in Parentheses.

Institutional factors also play a significant role in determining wage levels.

24 Nova Economia� v.28 n.1 2018

sector.10 Standard errors are robust to heteroscedasticity, and estimates,

School ***0.043 ***0.095 ***0.084 ***0.076 ***0.131 ***0.054 ***0.119

10 Transportation is excluded from Table 3 due to the absence of state-level value-added

ˆ js (ˆ j / ˆ w )ˆ j (2)

School 0.043 0.095 0.084 0.076 0.131 0.054 ***0.119

ln minwage 0.496 0.100 0.218 0.269 0.081 0.460 *0.200

School 0.211 0.459 0.442 0.363 0.484 0.270 ***0.554