The Political economy of the minimum wage

Abstract

I evaluate the effects of the 2016 minimum wage hike in Peru on the approval of government performance. My identification strategy exploits the regional heterogeneity in the share of workers directly affected by the increase to implement a series of difference-in-differences specifications. For every percentage point increase in the share of treated workers, the approval of the central government (i.e., the president) also increases by a percentage point. I find a partial spillover effect to other levels of government. These results are robust to a number of alternative specifications and falsification tests, and cannot be explained by the results of the 2016 presidential elections. My findings suggest that improvements in subjective living conditions and non-negative effects on observed labor market performance are the main mechanisms behind these causal effects.