Ebook Disentangling The Minimum Wage Puzzle: An Analysis Of Worker Accessions And Separations
The impact of the minimum wage on employment remains a controversial issue in the economics literature. Using mostly aggregate data, a certain consensus had been built around the idea that minimum wages reduce employment (see the overview by Brown, Gilroy, and Kohen 1982). This evidence was challenged in the 1990s by studies using mainly data on net employment changes at the firm level and taking advantage of the framework of quasi-experiments.
Such studies, by Card and Krueger (1994, 1995) and Katz and Krueger (1992), have launched an intense debate; this is illustrated, for example, in the Review Symposium in the Industrial and Labor Relations Review of July 1995, or by Burkhauser, Couch, and Wittenburg (2000), Card and Krueger (2000), Deere, Murphy, and Welch (1995), Dolado et al. (1996), Kennan (1995), Machin and Manning (1996), and Neumark and Wascher (2000).
In this paper we analyze the dynamics of employment at the firm level following a sharp increase in the minimum wage. Several novel aspects are introduced in the empirical analysis of the topic.
First, the change in the legislation being examined provides remarkably good conditions for economic analysis, because the increase in the mandatory minimum wage was large and unpredictable, and it affected only a specific group of workers. Indeed, in 1987 the minimum wage for workers aged 17 increased in Portugal by 50% due strictly to changes in the legislation and for workers aged 18 or 19 it was raised from 75% to the full minimum wage rate, an increase of 33%.
Second, the analysis relies on a panel of linked employer–employee data that covers, for each year, nearly all of the wage earners in the private sector (more than 2 million workers) an outstanding data set. Every firm with wage earners is legally obliged to reply to this inquiry by the Ministry of Employment, and the response rate is thus extremely high.
Third, the study handles issues that have not previously been explored in the literature. By explaining employer behavior regarding both accessions and separations and by focusing not just on firms remaining in business but also on new firms and those closing down, this study adds to the previous literature that has explained net job flows at the firm level. We can therefore address the minimum wage puzzle by identifying exactly where and how the minimum wage bites: Do employers dismiss mainly youngsters following a rise in the youth minimum wage? Or do youngsters become underrepresented among the newly hired workers? Do firms that are about to be set up, which are free to choose their labor force from the available pool of workers, hire relatively fewer youngsters than comparable firms did before the minimum wage was raised? Does a rising minimum wage place unbearable constraints on firms and so contribute to firm closure? Identification of the precise source for changing employment levels can reconcile some of the evidence that has previously been presented in the literature as contradictory.
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