Wages, Informality, and Net Fiscal Benefit in a Federation

Abstract

We estimate the net fiscal benefit (NFB) and the fiscal effect of unconditional grants on wages for twenty-six Brazilian states in the period 2005 to 2009. In particular, we explore the analytical framework proposed in Albouy to investigate the efficiency and equity effects of unconditional intergovernmental grants in Brazil. This framework can be understood as a positive exercise to comprehend whether grants mitigate the NFB differences across localities and whether they promote equalization in certain criteria. We explore labor market characteristics such as minimum wage and informality to evaluate efficiency and equity in grant distribution. According to our estimates, workers moving to more productive areas would obtain, on average, Brazilian Reais (BRL$) 0.52 less per year in NFBs on their earnings. Results suggest that unconditional grant policy in Brazil is associated with inefficiency because higher-paying areas with larger shares of formal jobs in metropolitan regions are negative recipients of grants.