3. Minimum wages

Question 1

Types of statutory minimum wages

Answer 1

1) National, government legislated - common in OECD countries
2) National - outcome of collective bargaining agreements - extended to all workers
3) Wage floors - resulting from industry (region)- level collective bargaining - extended to all workers in a particular industry

Question 2

Within-country variation of minimum wage

Answer 2

Minimum wage not always unique within a country
Can increase due to certain worker characteristics
Can be indexed to inflation or adjusted periodically by government

Sub-minima may be applied to particular categories

Can vary regionally

Question 3

Cross-country variation of minimum wage

Answer 3

Require measure that put minimum wage in relation to respective wage distribution

Ratio of minimum wages to the median (or average) wage can be used

Issue with this measure:
1) average wage can be influenced by spikes in upper tail
2) when taxation is strongly progressive , impact of MW can be underestimated -> use net wages
3) when measuring earnings, need to exclude nonrecurrent sources (measurement issue)
4) Spillover effects: introducing minimum wage can increase all wages higher up in the earning distribution- shifting distribution to the right - makes increase in minimum wage ineffective

Question 4

Coverage of minimum wage

Answer 4

Share of workers eligible for minimum wage

Question 5

Kaitz index

Answer 5

Minimum wage as a proportion of the average wage adjusted by industry level coverage of the MW

Question 6

Fraction affected

Answer 6

Workers with wages between the old and the new minimum wage

Question 7

Spike at the minimum wage

Answer 7

Share of workers paid exactly the minimum wage

Question 8

MW - Perfect labour market

Answer 8

Setting MW above market clearing wage reduces employment- increases equilibrium wage level
Two effects:
-Workers who were working at lower wages are displaced by the introduction of the MW
-Workers who were not supplying labour at the market clearing level are now willing to work at the the MW

SO: setting MW increases unemployment

Question 9

Minimum wage and product market competition

Answer 9

Firms are not price takers: part of the increase in costs associated with higher wage floors can be shifted to consumers as higher prices of the final good

The less competitive the labour market - the steeper the labour demand - the more likely that an increase in MW will have a positive effect on total labour income

Question 10

MW: Monopsony

Answer 10

Pure monopsony: MW can increase employment

N.B. pure monopsonist unilaterally sets a wage - thus, MC of hiring a worker is higher than the reservation wage of any additional worker

Reality: pure monopsonist is rarely a realistic setting
However, its dynamics can also be seen in cases when:
1) Firms in an oligopsony collude
-this can be favoured by collective bargaining
-but this means also employees are organised - wages are set as a result of a bilateral monopoly
2) When employers are numerous and very small with respect to the whole market - and market fractions make it difficult for workers to switch between jobs

Question 11

Types of studies analysing minimum wage

Answer 11

First Generation: studies based on firm-level or household survey data
Second Generation: studies based on natural experiments
Third generation: studies based on matched employer-employee data

Question 12

First Generation: pros and cons

Answer 12

Key results:
No major effect on employment (Dolado et al, 1996)
Negative effects on employment of MW for young workers (OECD, 1998, 2006, 2016)
Positive effects of rise in minimum wage of informal sector wages (!) - (Lemos, 2004, Grindling and Terrell, 2004, Jones, 1997)

Firm level data:
PROS: can track employment variations in the aftermath of a change in MW
CONS: fail to capture compositional changes in the workforce

Household data:
PROs: allow for comparisons of employment and wage outcomes of different categories of low-wage workers and of high-wage workers
CONs: do not provide information on firm level employment and wage response

Overall limitations: do not deal with confounding factors

Question 13

Lighthouse effect

Answer 13

Spillover effects beween formal sector and informal sector

Question 14

Second Generation: pros and cons

Answer 14

Firm level data:
PROs: DiD approach controlling for confounding factors
CONs: lack of generality of results - Card & Kreuger (1994)

More quasi-experiments:

Stewart (2004):
-studied effect of introduction of MW in UK (April 1999)
-comparison of employment outcomes of individuals just below the MW and higher up the wage distribution (1st difference) before and after the introduction of the MW (2nd difference)
Result: no adverse effects

Draca et al (2011):
- exploit the introduction of the National MW in Britain in 1999 to study its economic consequences using DiD approach

Question 15

Card & Kreuger - 1994

Answer 15

Studied impact of increase in MW in NJ
Treatment group: NJ
Control group: Pennsylvania
Treatment: increase in MW wage in NJ from $4.25 to $5.05, MW stayed the same in PA
Both states are bordering each other with otherwise similar economic characteristics
Data: 410 fast-foods in the two states in March 1992
Results: see lecture notes

Question 16

Third Generation

Answer 16

Main innovation is in the data
Third wave of literature improves on:
-capturing effects of hiring and layoffs
-understanding whole-market effects (rather than industry specific)
- describing the impact on hours alongside those on workers

Process:
Using longitudinal data on representative samples of workers matched to data on their employers - tracking labour market histories across firms of persons whose wages are at the minimum wage or close to it

Effects on job reallocation:
Abowd et al (1999) - 1% increase of MW in France reduces by 1.3% (1%) the probability that men (women) at the MW keep their job

Portugal & Cordoso (2011) - an increase by 50% of the MW in Portugal reduces hiring but reduces quits

Brochu & Green (2013) - MW reduces more hiring’s than separations at lower seniority levels

Giuliano (2013) - small increases of MW may increase hiring’s of youngsters - also leads to improvement of quality of applicants

Dustmann et al (2019) - MW in Germany induced reallocation from small (low-wage) to large (high-wage) firm

Harasztosi & Lindner (2019) - MW increase by 60% in real terms in Hungary:
80% of cost passed on to consumers

Overall:
MW can have significant effect on both job-finding and job-loss probabilities
Different results depending on country and characteristics of workers/ firms
In presence of monopsonies, we observe non-monotonic effects of the MW on employment

Question 17

Are MWs effective in reducing poverty?

Answer 17

MW is way to try and control monopsony power - more than to fight against poverty

Most studies: spike in wage distribution at the MW (effective bite=

Often negative effects on employment of youngsters (risk of crowding out, sub-minima)
If crowding out varies, effects on poverty ambiguous

Issue: setting correct MW

Question 18

Kreiner et al (2019 - Youth wage floors in Denmark

Answer 18

Discontinuity in level of MW at 18
Positive effects on hourly average wage (+40%); fall in number of persons employed at 18 (-33%)
Decline in employment rate due to job destruction (no changes in hiring side)
Evidence of substitution of workers across age groups

Question 19

Interactions between MW and other institutions

Answer 19

MWs often the object of collective bargaining
Boeri (2013): MWs set higher when they result from collective agreements rather than government legislated
ALMPs
If a too high MW increases unemployment, but political pressure makes it difficult to lower it, Employment Protection Legislation is tightened instead
If MW (youth) set too high, individuals may stop investing in their human capital and employers may reduce training of low-skilled workers
MW induced unemployment among low-productivity workers may be mitigated when combined with in-work benefits (anti-poverty wage insurance effect)