DISENTANGLING THE MINIMUM WAGE PUZZLE: AN ANALYSIS OF WORKER ACCESSIONS AND SEPARATIONS

Changes in the legislation in the mid‐1980s in Portugal provide remarkably good conditions for analysis of the employment effects of mandatory minimum wages, as the minimum wage increased sharply for a very specific group of workers. Relying on a matched employer‐employee panel data set, we model gross worker flows—accessions and separations—in continuing firms, as well as in new firms and those going out of business, using a count regression model applied to proportions. Employment trends for teenagers, the affected group, are contrasted to those of older workers before and after the raise in the youth minimum wage. The major effect on teenagers of a rising minimum wage has been the reduction of separations from the employer, which, during the period under analysis, has compensated for the reduction of accessions to new and continuing firms. In this sense, our results can reconcile some of the previous evidence in the empirical literature when analyzing the aggregate impact of the minimum wage on youth employment without decomposing it by type of worker flow. (JEL: D21, J23, J38)     

WHERE THE MINIMUM WAGE BITES HARD: INTRODUCTION OF MINIMUM WAGES TO A LOW WAGE SECTOR

Between 1993 and April 1999 there was no minimum wage in the United Kingdom (except in agriculture). In this paper we study the effects of the introduction of a National Minimum Wage (NMW) in April 1999 on one heavily affected sector, the residential care homes industry. This sector contains a large number of low paid workers and as such can be viewed as being very vulnerable to minimum wage legislation. We look at the impact on both wages and employment. Our results suggest that the minimum wage raised the wages of a large number of care home workers, causing a very big wage compression of the lower end of the wage distribution, thereby strongly reducing wage inequality. There is some evidence of employment and hours reductions after the minimum wage introduction, though the estimated effects are not that sizable given how heavily the wage structure was affected. (JEL: J4, J8)     

Collective Wage Agreements and Firms’ Employment Policies

This paper provides evidence on the way collective wage agreements affect the adjustment of employment, working hours and other production factors when service‐sector firms are faced with demand shocks. The estimation results indicate that collective wage agreements significantly influence firms’ employment policies. It is shown that recruitment is a widespread instrument for service firms to cope with demand fluctuations which are negatively affected by collective wage agreements. The employment of freelance workers is also negatively affected by collective wage agreements, while their effect on using short‐term employment contracts as a reaction to demand shocks is positive.     

Impact of the Minimum Wage on Youth Labor Markets

We study the effect of the minimum wage on labor market outcomes for young workers using US county‐level panel data from the first quarter of 2000 to the first quarter of 2009. We go beyond the usual estimates of earnings and employment effects to consider how differences across states in the minimum wage affect worker turnover via separations and accessions and job turnover through new job creation and job losses. We find that a higher minimum wage level is associated with higher earnings, lower employment and reduced worker turnover for those in the 14–18 age group. For workers aged 19–21 and 22–24, we find less consistent evidence of minimum wage effects on earnings and employment. But, even for these age groups, a higher minimum wage is found to reduce accessions, separations and the turnover rate.     

DO FINANCIAL INCENTIVES AFFECT FIRMS’ DEMAND FOR DISABLED WORKERS?

A number of OECD countries aim to encourage work integration of disabled persons using quota policies. For instance, Austrian firms must provide at least one job to a disabled worker per 25 nondisabled workers and are subject to a tax if they do not. This “threshold design” provides causal estimates of the noncompliance tax on disabled employment if firms do not manipulate nondisabled employment; a lower and upper bound on the causal effect can be constructed if they do. Results indicate that firms with 25 nondisabled workers employ about 0.04 (or 12%) more disabled workers than without the tax; firms do manipulate employment of nondisabled workers but the lower bound on the employment effect of the quota remains positive; employment effects are stronger in low‐wage firms than in high‐wage firms; and firms subject to the quota of two disabled workers or more hire 0.08 more disabled workers per additional quota job. Moreover, increasing the noncompliance tax increases excess disabled employment, whereas paying a bonus to overcomplying firms slightly dampens the employment effects of the tax.     

Unemployment Benefits and Employment Policies in the Presence of a Strong Trade Union: A Comparison

Abstract. The paper analyses, within a game theoretic approach, the consequences on private employment and real wages of a government policy of raising unemployment benefits following a fall in employment. The effects of such a policy are then compared with those arising from a more conventional demand policy. Under the policy regime described the reaction of the unions will cause, when the economy is hit by a negative shock on employment, a tendency for the real wage to rise and for private employment to decrease further. As far as the comparison of such policy with a policy of direct employment by the government is concerned we have reached the following conclusions. A policy based on unemployment benefit will give rise to a smaller increase in the real wage than a policy based on public employment if the change in the marginal utility of being employed due to change in the unemployment benefit is smaller than the utility that the union will obtain from an extra employed person. Moreover it appears that a policy based on unemployment benefits has a smaller negative effect on private employment, than a policy based on direct employment. if such a policy is adopted just after an employment benefits represent also a subsidy to the firms. We have shown that the effects on the real wage of the Policy rule considered are in this case stronger. The effects on employment depend on the relative strength of the union reaction and of the policy's supply side effects.     

Heterogeneous Firm Responses to Rising Teenage Wages

Substantial youth minimum wage changes in New Zealand between 2000 and 2007 raised teenage average wages by 5–10 per cent relative to those for adults. We use Statistics New Zealand's Linked Employer–Employee Database (LEED) to examine whether firms' teenage labour demand responses to these changes are greater for firms with higher teenage‐employment share. We find evidence that high teen‐employers reduced their teen employment relative to other firms and had lower survival rates over the period. However, firms that entered the main teen‐employment industries had higher teen‐employment shares than continuing firms. The results are consistent with endogenous technology adoption in response to non‐marginal changes in relative wages.     

The Impact on Inequality of Raising the Minimum Wage: Gap‐narrowing and Reranking Effects

Raising the minimum wage may reduce inequality by increasing the wages of low‐skill workers, but it may also increase inequality due to negative impacts on employment that produce wage losses. Using previous estimates of the elasticities of wages and employment to changes in the minimum wage in Colombia and Brazil, we show that the net impact on inequality of increasing the minimum wage may depend on the distributional weights used for inequality measurement. The results are obtained by decomposing the Gini index into reranking and gap‐narrowing effects. Inequality‐increasing reranking effects, which are associated with job losses, may dominate inequality‐decreasing gap‐narrowing effects, which are associated with wage gains, when high weights are placed on workers with low earnings. For standard distributional weights, however, the likely net impact is a reduction in wage inequality.     

Efficiency Wage,Fixed Employment Costs,and Dual Labour Markets

The standard efficiency wage‐based explanation of labour market dualism hinges on the existence of differences in monitoring across sectors. The paper proposes fixed employment costs as an alternative source of wage differentials for homogeneous workers. It shows that firms with larger fixed costs pay higher wages in order to elicit more effort from their workers, and tend to have higher capital/labour ratio and labour productivity. The model generates both involuntary unemployment and involuntary confinement in the secondary sector: high effort–high wage jobs are preferred to low effort–low wage jobs and either are preferred to unemployment. The proposed framework can also account for the various types of treatment of marginal jobs in primary sector firms envisaged by Doeringer and Piore (Internal Labour Markets and Manpower Analysis, 1971). In particular, an increase in fixed costs beyond a certain level may induce primary sector firms to restructure, segment production, and enter the secondary sector, thus converting their jobs into secondary jobs. From a welfare point of view, we cannot state in general the desirability of subsidizing fixed employment costs; however, we show that an employment subsidy financed by a wage tax is able to increase employment with no loss in terms of production.     

Standard of Living as a Right,Not a Privilege: Is It Time to Change the Dialogue from Minimum Wage to Living Wage?

Dating back to the 1930s, President Franklin D. Roosevelt argued that workers were entitled to a wage that allowed them to enjoy a decent standard of living—a conviction that led the president to propose the first federally‐mandated minimum wage. Mr. Roosevelt’s proposal was met with highly partisan resistance in congress and the courts—reactions not different in kind from the highly partisan resistance former President Obama experienced in his proposal to increase the federal minimum wage from its current level of $7.25 per hour. Reflecting President Roosevelt’s convictions, it is clear that many low wage workers today are not, and cannot, enjoying a decent standard of living at current minimum wage levels. Further, many of the economic arguments raised in opposition to increasing the minimum wage have been thoroughly discredited: empirical evidence suggests that increased minimum wages would not lead to dramatic spikes in unemployment, massive substitutions of capital for labor, business closings, and significantly increased consumer prices. However, as compelling as arguments for increasing the minimum wage may be, the reality is that this may not be sufficient to alleviate the plight of low income workers, particularly given the political nature of minimum wage adjustments. Indeed, it may be time to shift the national focus away from the minimum wage to an emphasis on viable living wage legislation, a proposition consistent with the social justice perspective of contemporary ethicists.     

Minimum Wages as a Barrier to Entry: Evidence from Germany

This study analyses employers' support for the introduction of industry‐specific minimum wages as a cost‐raising strategy in order to deter market entry. Using a unique data set consisting of 800 firms in the German service sector, we show that high‐productivity employers support minimum wages. We further find some evidence that minimum wage support is higher in industries and regions with low barriers to entry. This is particularly the case in East Germany, where the perceived threat of low‐wage competition from Central and Eastern European countries is relatively high. In addition, firms paying collectively agreed wages are more strongly in favour of minimum wages.     

Price Effects of the Minimum Wage: A Survey Data Analysis for the German Construction Sector

Utilizing the link between employment and price changes as a result of minimum wages, we use firm‐level data to evaluate the effect of minimum wage introduction in the German construction sector. In East Germany we find significant positive price effects that exclude the possibility of rising employment. Rather, the results indicate the existence of a competitive sector‐specific labour market, and thus declining employment. In contrast, we cannot find any significant price reaction for West Germany. This suggests that the implemented minimum wage in West Germany is too low in comparison to the predominantly paid wages and is hence not binding.     

Economic Growth and Welfare in a Neoclassical Overlapping Generations Growth Model with Minimum Wages and Consumption Taxes

We examine the effects of minimum wages on both the long‐run per worker GDP and welfare in the textbook Diamond style overlapping generations economy. In addition, we assume the existence of unemployment benefits financed at a balanced budget with consumption taxes. Under suitable conditions, it is shown that a regulated‐wage economy with unemployment performs better than a competitive‐wage economy with full employment in the long run. Moreover, a welfare‐maximizing minimum wage exists. Our findings may have interesting policy implications.     

The Effect of Legislated Minimum Wage Increases on Employment and Hours: A Dynamic Analysis

We present a dynamic policy simulation analysing what would have happened to wages, employment, and total hours had the federal minimum wage increased in September 1998, a year after the last actual increase in our data. Prior work suggests that employment responses take 6 years to play out. Using a time‐series model for 23 low‐wage industries, we find a positive response of average wages over 54 months following an increase in the minimum wage, but neither employment nor hours can be distinguished from random noise. Ignoring confidence intervals, the adjustment of hours is complete after 1 year, the adjustment of employment after no more than two and one half years.     

Is Wage Leadership an Instrument to Coordinate Unions’ Wage Policy?The Case of Imperfect Product Markets

Given an oligopolistic product market, trade unions organized at firm level want to coordinate their bargaining activities. If for some exogenous reasons centralization is not possible, unions could try to coordinate wage setting by wage leadership. The outcome of such wage leadership is compared with that of an uncoordinated bargaining and is characterized by higher utilities for all unions. But wages and employment levels are not symmetrical either for unions or for firms. The leader firm employment decreases and the follower firm employment rises compared with uncoordinated bargaining. This may cause problems with the implementation of wage leadership.     

More Jobs Through Less Employment Protection? Evidence for West Germany

ABSTRACT: In reaction to growing criticism of the allegedly negative employment effects of job protection regulations (lay-off and dismissal restraints), the West German government in 1985 introduced new legislation facilitating the conclusion of temporary (i.e. fixed-term) work contracts in order to stimulate employment growth (‘Employment Promotion Act 1985‘AZPA). The research unit ‘Labour Market and Employment‘ at the WZB has evaluated the employment and labour market impact of the new legislation for the period 1985-1988, and apart from providing a detailed analysis of the socio-economic and institutional diversity of job arrangements covered by the category of temporary (i.e. fixed-term) employment, the project‘s focus has been on the impact of minor changes in the institutional frame- work as effected by the EPA on firms‘ employment policies, as well as on the overall level of employment. Results show that like in most other European countries the temporary work force in Germany has considerably grown over the past years in both absolute and relative terms, this increase, however, being largely due to cyclical factors as well as medium-term structural changes on the supply and demand side of the labour market rather than to changes in the regulatory framework as effected by the EPA. The impact of the new regulations on firms‘ hiring decisions and on the overall number of hirings in the total economy have to be regarded as rather modest, in fact amounting to not more than an estimated 25,000 additional hires per year or roughly 0.5|X% of all employment contracts concluded in the private sector. This marginal positive impact on firms‘ employment decisions, however, is counterbalanced by unintended substitution effects and an increase in involuntary quits arising from them when labour demand declines. Even under the overall positive employment development given in the period under investigation the net employment effects of the EPA temporary work legislation thus are shown to be at best marginal. In case of a deterioration of the overall economic situation, however, the increase in temporary job arrangements supported by the new legislation is likely to lead to accelerated workforce adjustments by firms and thus over time to result in a depression of the overall level of employment. From a theoretical point of view, the findings suggest that measures aiming at de-regulating labour relations such as the EPA largely fail to modify essential behavioral parameters of economic actors in economic environments which for decades have adjusted to a relatively high level of welfare state regulation, as has been the case in Western Germany.     

Productivity,Real Wages and Worker Rights: A Cross-National Comparison

ABSTRACT: High unemployment in Europe has led many economists to recommend labour market deregulation — the removal of obstacles to labour market flexibility. These “obstacles” include union power, employment protection legislation and income security arrangements. We argue that such worker rights promote productivity and real wage growse effects. Policy-makers should be aware of these positive effects on productivity and real wage growth when considering curtailing worker rights in order to reduce unemployment.     

The Detrimental Side Effects of Minimum Wage Laws

The adverse effects of minimum wage legislation demonstrate how a government policy presumably intended to help people worst off in society can actually end up causing far more harm than good. In this case, the victims are unskilled laborers. By making it illegal for employers to pay unskilled workers wages equal to their marginal revenue productivity, it causes unemployment for all workers whose productivity happens to be below the minimum wage. It also widens the wage gap between whites and minorities because there are disproportionate numbers of unskilled and uneducated minorities compared with whites.     

The Skilled Wage Premium and the Growth of Small Firms in UK Manufacturing

We document the role of small firms in explaining the growth of the skilled/unskilled wage premium in UK manufacturing over the 1980s. Our major findings are (i) the share of manufacturing employment in small firms' (0–99) employees has risen by 35 percent over this period; (ii) small firms pay more unequal wages than do large firms: the non-manual/manual wage premium is 1.53 in small firms and 1.50 in firms of over 1,500 workers; (iii) the growth in small firms over the period explains about 20 percent of the rise in the skilled/unskilled wage premium.     

Firm‐level Consequences of Large Minimum‐wage Increases in the Czech and Slovak Republics

Abstract. After an initial decline in the level of real minimum‐wage rates, there were series of unusually large increases in their levels — 70 and 50 per cent — during the years 1999–2002 in the Czech and Slovak Republics, respectively. Using information from matched employee–employer data sets, we look at the impact of minimum‐wage hikes on both wages and employment. Our results suggest that there are some, but not substantial, job losses in reaction to minimum‐wage hikes and that the impact on firm wages is rather large, implying that further increases of similar magnitude might very well have negative consequences for employment.