Monopsony, Minimum Wages and Migration

Transcription

1 Business School W O R K I N G P A P E R S E R I E S Working Paper Monopsony, Minimum Wages and Migraion Eric Srobl Frank Walsh hp:// IPAG Business School 184, Boulevard Sain-Germain Paris France IPAG working papers are circulaed for discussion and commens only. They have no been peer-reviewed and may no be reproduced wihou permission of he auhors.

2 Monopsony, Minimum Wages and Migraion Eric Srobl 1 Frank Walsh 2 Absrac We show in a monopsony model ha in response o a small increase in migraion employmen will increase in boh low produciviy non-complian firms who pay less han and in high produciviy firms who pay more han he minimum wage, bu will increase by proporionaely more in minimum wage firms who are consrained by he labour supply curve. Using daa from Thailand we provide evidence ha increases in inward ne migraion are indeed associaed wih a proporionaely greaer increase in employmen a han below he minimum wage. 1 Ecole Polyechnique Paris and IPAG Research LAB. 2 Universiy College Dublin, Belfield Dublin 4, Ireland. frank.walsh@ucd.ie

3 Inroducion I is well known in exbook monopsony models ha if a minimum wage is inroduced, here is a range of values for he minimum wage where employmen will increase [See Borjas (1996) chaper 5 for example]. A sraighforward implicaion of his resul is ha if a minimum wage is se in he range where employmen increases, a small increase in migraion will increase employmen of workers employed a he minimum wage. If, in conras, he minimum wage is above he range where employmen is increasing, firms are on heir labour demand curve and we have he sandard compeiive resul ha an increase in he minimum wage lowers employmen while an increase in migraion leaves employmen unchanged for a binding minimum wage. Arguably, wheher his resul holds rue more generally is of considerable imporan as i idenifies a channel hrough which low skill employmen can increase in response o inward migraion wihou lowering wages. However, o his bes of our knowledge no oher paper has poined ou or esed his implicaion of he monopsony model, alhough Hirsch and Jahn (2012) and Hochkiss and Quispe-Agnoli invesigae empirically wheher migrans or undocumened workers respecively have differen labour supply elasiciies moivaing he empirical es wih an appeal o monopsony models. 3 In his paper we hus explicily explore wheher employmen of minimum wage workers may increase faser han oher workers in response o an increase in migraion using a monopsony model of he labour marke, and subsaniae our findings using empirical evidence for Thailand. There is of course already a large lieraure looking a he employmen effecs of minimum wages, wih some very prominen sudies such as Card and Krueger (1995) finding eiher no negaive employmen effecs or some small posiive effecs. Such sudies ofen cie 3 For example Hirsch and Jahn (2012) sugges ha when migrans ener a new labour marke hey face higher search coss which confers a greaer degree of monopsony power on employers who hire migrans. 1

4 imperfecly compeiive models, such as monopsony models, as a way of raionalising heir resuls; see Card and Krueger (1995) or Giuliano (2013) for example. Such models of monopsony end o use facors such as search fricions or urnover coss [see Manning (2003) or Dickens e al. (1999) for example] or firm specific preferences [see Bhaskar and To (1999) or Walsh (2003)] o moivae why firms may have monopsony power 4. The degree of monopsony power in hese frameworks ofen differs across firms [as in he model of Dickens e al (1999)] or worker ypes, so ha generalising he model o allow for his heerogeneiy is imporan 5. In he heoreical framework employed here we analyse he impac of migraion wih a binding minimum wage in such a monopsony model wih homogeneous firms and many differen levels of worker abiliy. We show ha if he firm faces he same relaive supply curves for each abiliy group, he firm will be on he labour demand curve and he minimum wage will bind for he lowes abiliy workers for whom relaive demand (marginal produciviy) will be lowes. An increase in migraion leaves employmen unchanged for his group as in he compeiive model. For higher abiliy groups where labour supply is less han he number of workers he firm wishes o hire 6, he firm is consrained by he labour supply curve, and an increase in labour supply (migraion) will increase employmen of his group. Migraion will also increase employmen of abiliy groups for whom he minimum wage is no binding. We hen inroduce non-compliance wih he minimum wage ino our model where workers are homogeneous and here is variaion in firm produciviy. Arguably, noncompliance is an imporan issue, paricularly in many developing counries, including Thailand. Since he empirical evidence suggess non-compliance ends o be concenraed in 4 Arguably he increased mobiliy of workers and firms sugges ha more radiional monopsony models where large employers dominae local labour markes by virue of heir size may be less imporan han in earlier imes as suggesed by Brown e al. (1982) for example. 5 The April 2010 ediion of he Journal of Labor Economics was a special issue focussing on Monopsony in he Labor marke. Ashenfeler e al (2010) summarises he papers in his volume. Many of he sudies in he volume provide evidence of monopsony power for paricular groups of workers, labour markes. 6 This is as in Figure 1. 2

5 small firms 7, we employ a model wih one skill group bu where firm size, which is in consequence o a produciviy parameer, deermines wheher he firm finds i profiable o be complian wih minimum wage rules or no. We show ha while migraion increases employmen in non-complian firms, he posiive effec of migraion on employmen is proporionaely higher in firms ha are consrained by he minimum wage bu where he labour supply consrain is binding. For firms ha comply wih he minimum wage bu who are on he labour demand curve, migraion leaves employmen unchanged. One can hus conclude ha he bigger he share of minimum wage employmen ha is accouned for by firms who are consrained by he labour supply consrain relaive o he share in firms who are on he labour demand curve, he more likely i is ha minimum wage employmen will rise by proporionaely more han employmen in non-complian firms. There is also a large lieraure ha analyses he labour marke impac of migraion [ See Hanson (2010) for a review ha concenraes on he lieraure in relaion o he developing world]. Given he size of hese flows and he widespread applicaion of minimum wages ha are binding, he predicions of he model presened here are shown o add a poenially imporan elemen o our undersanding of how migraion effecs employmen and wages in he hos economy if hey are shown o have empirical suppor. In seeking empirical evidence supporive of he predicions of our model i is of course imporan o noe ha ha here are fundamenal difficulies in empirically esing he predicion ha employmen may increase in response o a minimum wage. More precisely, exogenous changes in he minimum wage in one marke relaive o anoher comparable end o be rare. Indeed Card and Krueger spend a good deal of ime convincing he reader ha he naural experimen hey examined, i.e., where he minimum wage increased in New Jersey bu no in neighbouring Easern Pennsylvania, did acually represen an exogenous change in he minimum wage. 7 See Srobl and Walsh (2003) for a discussion of non-compliance and he minimum wage. 3

6 Here we uilize rich labour marke daa for Thailand and, following Bousan e al (), use regional weaher variaion o consruc arguably valid insrumens for iner-regional migraion in our economeric analysis. Our resuls indeed show ha an increase in inward ne migraion is associaed wih an increase in employmen of minimum wage workers and ha his is proporionaely greaer han he increase in employmen of workers paid less han he minimum wage. Finally, one may wan o noe ha Srobl and Walsh ( 2011) show ha using a sandard compeiive model of he labour marke, where firms choose a combinaion of he number of workers and hours, ha he heory predics ha he change in he number of workers and oal hours in response o an increase in he minimum wage is ambiguous. Tesing he empirical predicion of our model ha employmen a he minimum wage and perhaps he share of minimum wage employmen may increase in response o an increase in migraion/labour supply can hus be viewed as an alernaive es of he monopsony model. The remainder of he paper is organized as follows. In he subsequen secion we inroduce our heoreical model. Secion III describes our daa se and provides some summary saisics. The economeric framework and is resuls are given in Secion IV. Finally, concluding remarks are provided in he final secion. I. A monopsony model wih heerogeneiy in worker abiliy As a saring poin for our heoreical analysis we firs illusrae he relevan resul of a sandard simple exbook monopsony model regarding he impac of minimum wages on employmen graphically in Figure 1. As can be seen, in he absence of a minimum wage he monopsony soluion is where he marginal cos of labour inersecs he labour demand curve, where employmen is m l and he wage is m w. If a minimum wage is imposed a w his 4

7 becomes he marginal cos of labour and employmen increases o l. Thus, if an increase in migraion shifs he labour supply curve and marginal cos of labour o he righ, employmen increases by he verical shif in he labour supply curve o 1 l. Below we invesigae his aspec more generally in a monopsony model wih homogenous firms and differen levels of worker abiliy. I.1: The model wih many skill groups and full compliance Each firm is a he end of a uni inerval. There is a mass i of each of m ypes of worker uniformly disribued along he inerval, where each worker ype has a differen produciviy characerisic and a zero reservaion wage. The producion funcion is: y F( L) Where he vecor of workers of each ype is: L ( l1... l m ). We rank he worker ypes numerically so ha he number of he lowes produciviy workers in he firm is labelled l 1, he second lowes: l 2 up o he number of he highes produciviy workers l m. For any group of workers k: Fl k ( L) 0 and Fll ( L) 0. In line wih he assumpions above we assume ha kk F ( L) F ( L) if k>j. The ranspor coss associaed wih ravelling a disance x o go o lk lj work is x for all workers. All workers have a reservaion wage of zero. This implies ha a worker of ype k who is wihin disance 0 x of he firm will be willing o work for firm i as long as he wage exceeds ranspor coss: x 0k w k (1) The labour supply curve facing a firm for his labour ype is: l k k wk (2) 5

8 We assume ha he supply parameer k is he same for each worker ype. We also assume ha he firm mus pay all workers wihin any skill group he same wage. Tha is hey canno discriminae. The measure of he labour force is: M m k k 1. Workers can fall in hree differen caegories: firms (a) pay some workers more han he minimum wage, (b) pay some workers he minimum wage bu are consrained by he labour supply consrain, (c) pay some workers he minimum wage bu where hese workers are no consrained by he labour supply consrain. We caegorise he se of worker ypes in each of hese hree caegories as: a, b, c respecively. We noe ha if a firm chooses an amoun of any labour ype such ha: l k, i can choose o eiher pay he minimum wage or pay he wage implied by he k w labour supply curve of ha labour ype, which is less han he minimum. However, if hey pay less han he minimum, hen here is a chance ha hey will be prosecued for noncompliance and face a penaly. Iniially we assume he penaly is large enough and enforcemen echnology is effecive enough o ensure full compliance. Laer we will deal wih non-compliance in a model wih a single skill group. Given hese assumpions he profi funcion can be wrien (3) y w l wl wl i k k k k kc kb ka We can examine how he firm chooses he number of workers in each of hese hree caegories. If he firm chooses o pay more han he minimum wage o any worker ype i, where ype i workers are in caegory a, he firm is on he labour supply curve for his worker ype and he firs order condiion for employmen is: i Fl ( w) 2w 0 w i i i w (4) 6

9 Alernaively he firm could pay he minimum wage, in which case he firs order condiion ha would maximise employmen depends on wheher he labour supply consrain is binding on he firm in choosing he opimal number of workers o hire. If he labour supply consrain is binding for any worker ype j who are in caegory b, he firm will choose he number of employees where: * w Fl ( L) w 0 l j j j (5) This is he condiion where he firm would like o hire more workers a he minimum wage, bu given he labour supply consrain canno wihou increasing he marginal cos of labour above he minimum wage. If he firm can hire as many workers as i wishes a he minimum wage for any worker ype k who are in caegory c, hen he firs order condiion which deermines employmen is: * w Fl ( l) w 0 l k k (6) We see immediaely ha if we are in an equilibrium wih some workers in each of caegories a,b and c, hen he highes produciviy workers will be in caegory a since employmen is increasing in marginal produciviy. We noe from our earlier assumpions ha marginal produciviy is increasing in abiliy. We define * k as he abiliy group below which he minimum wage is binding. One should noe ha i would no make sense for a firm o pay any abiliy group above * k less han he minimum wage. For groups wih abiliy less han ha of group * k here is a lower hreshold abiliy group ** k, whereas for groups wih higher abiliy han group k ** bu lower abiliy han group k * labour demand will be high enough so ha a he minimum wage he firm will maximise profi according o equaion (5). In his case he skill level and marginal produc of labour is high enough o ensure ha he firm will 7

10 hire all workers willing o work a he minimum wage bu marginal produciviy is no high enough o make he firm wan o pay more han he minimum. For groups wih abiliy less han ha of group ** k he firm will maximise profi a he minimum wage according o equaion (6). In oher words, skill and marginal produciviy are low enough so ha if he firm pays he minimum wage he number of workers i wishes o hire is less han he number willing o work according o he labour supply curve. Proposiion One: For any worker ype k where he minimum wage is binding and where he labour supply consrain is binding on he firm a he minimum wage: (a) A small increase in he minimum wage will increase employmen of ha worker ype a he firm. (b) A small increase in migraion (he labour force) of group k will increase employmen of ha worker ype a he firm. Proof: From equaion (5) employmen of worker ype k is lk w. We see ha his is increasing in he minimum wage and in he mass of ype k workers Proposiion One depends on he fac ha he labour supply of any worker group is independen of he labour supply of oher groups. I shows ha he resul of he exbook monopsony model ha a small increase in he minimum wage or migraion will increase employmen when he firm is consrained by he labour supply curve persiss even when here are many abiliy groups, some of whom are paid more han he wage and some for whom he firm may no be bound by he labour supply consrain bu pays he minimum wage. Of 8

11 course his is rue only for a small change because a discree change in any labour ype may affec he hresholds k* and k** and poenially change employmen. Proposiion Two: For any worker ype k where he minimum wage is binding and where he labour supply consrain is no binding on he firm a he minimum wage, an increase in migraion of ype k workers, or of any oher group in he se b, leaves employmen unchanged. Proof: The employmen vecor for each of he m worker ypes is deermined by he soluion of m simulaneous equaions. For each worker ype in caegory a employmen is deermined by he soluion o equaion (4). For each worker ype in caegory b employmen is given by solving equaion (5), and for each worker ype in caegory c employmen is given by solving equaion (6). When we wrie ou hese m equaions we noe ha each one is independen of a small change in or a small change in he mass of any oher worker ype in caegory b. k Proposiion Two shows ha he resul ha when firms are on heir labour demand curve employmen will be unaffeced by migraion of more workers of ha ype, coninues o hold irrespecive of he abiliy disribuion. I.2: Non-compliance wih he minimum wage: The previous secion showed ha an increase in migraion will increase employmen of worker groups ha are consrained by he labour supply curve bu leave employmen unchanged for worker groups ha are no consrained by labour supply. For many counries, 9

12 and developing counries in paricular, non-compliance wih he minimum wage is widespread. This complicaes he model since low skill migrans who canno find minimum wage employmen may ener uncovered employmen. In his secion we use a framework wih homogeneous workers bu heerogeneiy across firm produciviy ha generaes variaion in firm size. This allows he model o mimic he sylised fac ha compliance wih he minimum wage ends o fall sharply in larger firms. Produciviy will affec he firm s size and in urn he firm s choice beween compliance and non-compliance wih he minimum wage. We will look a four ypes of firms respecively: (1) firms ha do no comply wih he minimum wage, (2) firms ha pay more han he minimum wage, (3) firms ha pay he minimum wage and are on heir labour demand curve, and (4) firms ha pay he minimum wage bu are consrained by he labour supply curve. We show ha in a monopsony seing wih some non-complian firms, an increase in migraion will expand employmen in non-complian firms and in firms who pay more han he minimum wage. Employmen is unchanged in firms who pay he minimum wage and who are on he labour demand curve bu increasing in complian firms who are consrained by he labour supply curve. We will show hough ha he proporionae increase in employmen is greaes in he supply consrained minimum wage firms. We assume ha he probabiliy of being caugh no complying wih he minimum wage is an increasing funcion of firm size 8 : q( l) q( w) where ql 0 and qll 0 (7) The funcional form of his equaion possibly depends on insiuional feaures ha vary across differen labour markes. We assume here ha in counries where non-compliance is 8 Firms paying less han he minimum wage will be on he labour supply curve. 10

13 prevalen he abiliy of regulaors o idenify small firms who are non-complian may be limied. The abiliy of a regulaor o effecively impose penalies may also vary wih firm size. In heory a large enough penaly will ensure full compliance as long as here is some possibiliy of being caugh. In pracice he size of he penaly ha can be colleced may be limied by he wealh of he employer (which is possibly posiively relaed o firm size) or social norms ec. We assume ha he penaly ha firms pay if caugh paying less han he minimum wage is he amoun of he wage bill less han he minimum wage plus a fixed per worker penaly A. : ( w w A) l ( w w A) w (8) For a firm ha is no-complying wih he minimum wage, he profi funcion is: 2 PF( w) w q( w)[( w w A) w] w w (9) The firs and second order condiions and cross parial erms are respecively: w { PFl ( w) 2 w[1 q( w)] ql ( w)[( w w A) w] q( w)( w A)} (10) ww { PFll 2(1 q) 4 wql qll [( w w A) w] 2 ql ( w A)} (11) w w { PF 3 q w q [( w w A ) w ] 2 q ( w A )} (12) w ll l ll l We assume ha qll 0 so ha he probabiliy ha a firm is caugh paying less han he minimum wage is increasing in employmen bu ha he second derivaive is also posiive. Even wih his i is no clear ha he second derivaive in (11) is negaive, however we can 11

14 show ha since w w, a sufficien condiion for (11) o be negaive is ha he per worker fixed penaly for non-compliance wih he minimum wage is more han he minimum wage: A w w (13) Toally differeniaing he change in he wage from a small change in migraion/labour supply is: dw d w (14) ww Since w 0 a he opimum and given ha we can say ha equaion (12) is negaive if inequaliy (13) is rue, his implies from equaion (14) ha an increase in migraion would lower he wage paid by non-complian firms. Since hese firms are on he labour supply curve he change in employmen and proporionae change in employmen from a change in migraion are: dl l dw l w dw dl 1 1 dw (1 ) d d w d d l d w (15) dw We noe from equaion (15) ha if 1hen employmen could fall in response o an d w increase in migraion in non-complian firms. We show in he Appendix ha his will no be he case. For a firm paying more han he minimum wage he profi funcion is: 2 PF( w) w w w (16) 12

15 The firs order condiion is: PFl ( w) 2 w 0 (17) I is sraighforward o see ha he second order condiion is negaive. Toally differeniaing he firs order condiion we see ha he change in wage from a change in migraion is: dw d w PFll 2 2 PFll ( ) 2 0 (18) The change in employmen from a change in migraion is given by equaion (15) above. For a firm ha pays he minimum wage he profi funcion is: PF( l) wl w w (19) If produciviy is low enough so ha he firm wishes o hire fewer workers han are supplied a he minimum wage, hen he firm is on he labour demand curve and he firs order condiion is: w l PFl( l) w 0 l (20) In his case a small change in migraion has no effec on firm level employmen since employmen is consrained by he labour demand curve as was he case in Proposiion wo above. 13

16 If he firm wishes o hire more workers han are supplied a he minimum wage he firms opimising condiion is: w l PFl( l) w 0 l (21) In oher words, he las worker hired has a higher value of marginal produc han marginal cos, bu he firm is consrained by he labour supply curve. As in Proposiion One above he change in employmen and proporionae change in employmen from a small change in migraion are: dl w dl 1 1 (22) d d l dw We see, comparing (22) and (15) ha since w wand <0in equaion (15), for noncomplian firms ha he change and percenage change in employmen from a change in d migraion are posiive bu lower han for a minimum wage firm which is consrained by he labour supply curve. In conras, for smaller minimum wage firms who are on he labour demand curve employmen is unaffeced by an increase in migraion while i increases for non-complian firms. Nex we illusrae ha smaller low produciviy firms will be non-complian. The difference beween profi of a complian minimum wage firm and a non-complian firm is given by he difference beween equaions (19) and (9): 2 P[ F( l ) F( w)] w q( w)[( w w A) w] wl (23) 14

17 The opimal choice of employmen for a minimum wage firm saisfies equaion (20) and is l while w is he opimal wage chosen by he non-complian firm according o equaion (10). The derivaive of he profi differenial given in equaion (23) wih respec o produciviy is: d( ) l w [ F( l ) F( w)] F (.) { Fl (.) 2w l dp P P ql (.) [( w w A) w] q(.) ( w 2 w A)} 0 (24) l Since[ F( l ) F( w)] 0, 0 P w and 0 i is sraighforward o see ha he difference P in profis beween complian and non-complian firms is increasing in produciviy. Thus, as long as here is an equilibrium wih some non-complian and some complian firms, he noncomplian firms will be small low produciviy firms. We define he number of workers employed a he minimum wage in firms ha are on heir labour demand curve or consrained by he labour supply curve respecively as: d E and s E, and oal minimum wage employmen as: d s E E E. We define he number of workers employed in non-complian firms as: n E. Given his he rae of compliance wih he minimum wage is: c E n E E and he percenage change in compliance is: E d( ) n n n n n dc n E E d E( E E) de E d EE d EE de E d E de c[ ] n n n n c E E( E E) E ( E E) E E ( ) n E E (25) An increase in migraion will hus only increase compliance if he percenage increase in minimum wage employmen is greaer han he percenage increase in non-complian employmen as we expec. This means ha if we observe an increase in compliance in 15

18 response o a minimum wage ha employmen of minimum wage workers is increasing unless employmen in non-complian firms falls in response o an increase in inward migraion. The likelihood ha employmen of non-complian workers would fall in response o an increase in labour supply seems inuiively implausible in mos economic models and as we show in he Appendix i canno happen in he model we presen here. We nex invesigae wheher hese predicions are consisen wih he empirical evidence using daa from he Thai labour marke. II. Daa and Sample Selecion II.1: Minimum Wages in Thailand A daily minimum wage is legally enforced in Thailand under he Labour Proecion Ac (1998). 9 Under his ac he Naional Wage Commiee comprised of employee and employer represenaives and represenaives of he minisry for labour periodically makes recommendaions o he governmen concerning adjusmens o he minimum wage rae. In addiion, riparie provincial commiees can review wage siuaions in heir respecive areas and recommend ha a minimum wage ha is higher han he basic rae be se for cerain provinces. Provincial raes canno be below he naional minimum rae. Agriculural workers and domesic workers are no covered by he minimum wage legislaion. Employers who run privae schools are also excluded from he Labour Proecion Ac, as are workers in cenral, provincial and local adminisraion and sae enerprises governed by he Law on Sae Enerprises. The labour proecion ac specifies an enforcemen regime where labour inspecors are eniled o ener workplaces during work hours and inspec labour records ec. Penalies, including fines and erms of imprisonmen, may be applied o employers found no o be in compliance. How sric he regime is in pracice is difficul o know, bu, as we will 9 The firs Thai minimum wage was enforced in

19 see below, here appears o be widespread non-compliance wih he minimum wage amongs covered workers. 10 II.2: Thai Labour Force Survey Our main daa source is he Thai Labour Force Survey (TLFS), where we have access o he surveys conduced beween 1991 and The TLFS is conduced several imes a year, wih increasing frequency in recen years. We have access o daa for he February and Augus surveys for each year, where Augus is he peak of he agriculural season and when labour markes are much more buoyan wih significan inernal migraion as workers reurn o rural areas for harvesing, whereas February clearly represens he off-peak season of agriculure in Thailand. The survey is a large cross-secion; for example, he February 2000 survey has 164,636 observaions. In sum, he complee daa consiss of weny waves wih a oal of 2,951,839 observaions. The survey conains a wide variey of quesions on locaion, employmen saus, and job characerisics, as well as demographic characerisics. Daa on earnings asks workers if hey are paid hourly, daily, weekly, or monhly and wha he rae of pay is for he relevan caegory. We use he TLFS o consruc wo daa ses: (i) minimum and poenially minimum wage relevan males, and (ii) male migraion flows beween provinces. 11 II.3 Daily Wage Male Sample For he main regression analysis, where we invesigae how migraion flows affec he probabiliy of being employed in a minimum wage complian job for non-migran (incumben) workers, we work wih a reduced sample of males from he daa se. Firsly, we 10 The ILO Travail daabase provides more deail on hese issues hp:// 11 There are 72 provinces in Thailand. 17

20 reduce he sample o non-migran men aged who were no aending school a he momen of he survey and who work 95 hours or less a week in he privae secor. 12 We also drop observaions of self-employed, governmen or public service workers as well as workers who are in unpaid jobs or in secors no covered by he minimum wage 13. Since we are ineresed in idenifying hose workers ha are paid he minimum wage or poenially could be, we aemped o build a sample ha was as relevan as possible o his group. In his regard we only include daily wage workers since minimum wages are defined in erms of daily values. This allowed us o avoid poenial measuremen error for monhly and yearly paid workers where we would have had o esimae heir daily wage value by dividing income by he repored number of days worked las week. Abou 52 per cen of male workers in Thailand are paid a daily wage as remuneraion. To limi our sample furher o hose for which he minimum wage would be relevan, we reduced our sample o hose whose daily wage was equal o heir province s minimum wage or below i. In order o allow for some measuremen error we defined hose as complian o he minimum wage as hose ha were paid wihin 1 per cen of is official value given in any year, alhough we also as a robusness check use a sample ha allows for a larger error band of 5 per cen. All hose ha are paid below his minimum wage band are considered noncomplian. To demonsrae ha he minimum wages were indeed `binding for a subsanial group of workers and ha our measuremen error band is reasonable we divided an individual s wage by he relevan minimum wage and depic he disribuion of his raio for a range of values from 0.5 o 1.5, wih verical lines illusraing he 0.99 and 1.01 bands around he minimum wage in Figure 2. As can be seen, wihin his range nearly 40 per cen of observaions are wihin he 1 per cen bands around he minimum wage, indicaing ha daily 12 We focus on males o avoid he sample selecion issues associaed wih females who have lower paricipaion raes. 13 Using deailed occupaion codes from he daa uncovered workers are hose whose indusry/occupaion code indicaes ha hey work in privae households, are relaions/servans living in he house of heir employer or work in Agriculure or governmen. While eachers in privae schools are no covered we could no exclude his group since we can idenify hem explicily according o secoral and occupaional codes of our daa. 18

21 minimum wages are indeed meaningful and poenially binding in Thailand. In conras, we also depic he same graph bu for hose privae secor workers ha have no minimum wage in Figure 3. For his sample, in sark conras, here is no peak a he minimum wage and he general disribuion of relaive wages is very differen han for he complian secors. Our final sample hus consiss of minimum wage complian and non-complian male daily workers, providing a oal of 29,366 observaions afer dropping all observaions for which here were missing values for any variables we used in our empirical analysis. As can be seen from he summary saisics in Table 1, in our sample 82 per cen are paid below he minimum wage. As is commonly found in developing counries, he degree of noncompliance falls wih firm size. The average wage in our sample is 102 bah per day, while abou 82 per cen of workers are low-skilled workers. High-skilled persons are hose wih an educaional level beyond he secondary level and low skill secondary educaion or less. II.4 Migraion Flow Raes In erms of consrucing migraion flows, imporanly, in addiion o providing he name of he province where hey live, individuals in he survey answer he following quesion: How long have you been living regularly in his village/ municipaliy? In his regard, respondens can choose among he opions: (a) from less han a year, (b) one year, wo years, (c) up unil nine, or (d) more han nine years. We exclude people who move ino he same province and calculae he number of recen arrivals as hose who answer less han or equal o one year. This number corresponds o 124,185 males and represens 52.4% of oal movers o new provinces. 14 We use his subsample of movers o compue he male inflow raes across provinces. To calculae ouflow raes we uilize he quesion Which is he previous province of your residence before moving here?, which allows us o define he province of origin and 14 Noe ha he caegory of movers wihin provinces represens 29% of all movers and ha 49.4% of he sample of movers from his caegory moved one year ago a mos. 19

22 he desinaion province of all movers. From hese quesions we hen calculae male inflow, ouflow and ne migraion raes for each province. Imporanly one should noe ha our migraion raes are consruced from all male migran flows (and no jus he reduced daily wage sample), alhough we do also experimen wih using skilled and unskilled migraion flows when examining hese specific groups. We provide summary saisics of our migraion flow raes in Table 1. Accordingly, he average inflow rae is 4.6 per cen, while he ouflow is abou 3.7 per cen 15. III. Economeric Analysis III.1 Consrucion of Migraion Rae Insrumens In order o consruc insrumens for migraion we follow he mehodology proposed by Bousan e al. (2010), which consiss of predicing he oal ouflow (inflow) from a region induced by weaher shocks, and hen decomposing his ouflow (inflow) ino desinaion regions by esimaing he role of geographic disances in deermining iner regional flows. We hen use boh weaher and disance o consruc he prediced inflow (ouflow). More specifically, for he case of migraion inflow his firs involves regressing oal ouflow raes of each region on a se of climae deerminans: O rae Z (26) ' i, 1 i, 1 i, where O raei, 1 is he ouflow rae from source region i over ime period 1 o, Z is a vecor of climae specific indicaors, and is an error erm. Using he esimaed coefficiens from (26) he prediced flow of migrans leaving each region i, Oi, 1, is hen jus equal o he prediced ouflow rae O raei, 1, imes he populaion a 1. O O rae * Populaion (27) i, 1 i, 1 i, 1 15 The ne flow of migrans is close o zero a as we expec since one provinces inflow is anoher s ouflow summing o zero. 20

23 One hen separaely for each sending area i regresses he acual se of desinaion specific ouflow raes o each desinaion region j on heir relaive disances and i s squared and cubic value 16 : O rae Disance Disance Disance (28) 2 3 ij, 1 i i ij i ij i ij i, The insrumen for in-migraion o region j, j, 1 I, is hen jus he sum of he prediced number of migrans over all areas i j, O raeij, 1 expeced o sele in region j: I O * O rae (29) j, 1 i, 1 ij, 1 i1,, n ( ij) One can hen in a similar manner consruc prediced ouflow from area j by predicing he in-migraion raes o each receiving area i using climaic deerminans, using hese raes o predic he number of inflowing migrans ino i, and hen consruced prediced ouflow migrans by muliplying his figure by he disance and is non-linear erms esimaed inflowing raes beween regions i and j(i j). In order o esimae (26), as well as is analogous specificaions for he in-migraion, we use for he vecor Z a number of measures ha capure weaher condiions in a region. In order o idenify periods of exreme weness and dryness in regions we firs calculaed he local sandardized precipiaion index (SPI), which has been argued o be paricularly good a capuring he cumulaive effec of high and low paerns of rainfall over ime in a chosen localiy, from he mean monhly precipiaion values wihin our regions as calculaed from he IPCC daa se. 17 Following McKee e al. (1993) we hen define a monhly exremely dry (we) even as saring when he SPI reaches an inensiy of -2.0 (2.0) or less (more) and as 16 One should noe ha Bousan e al. (2010) regress hese raes only on disance and is squared value. For he case of Thailand we found ha including is cubic value subsanially increased he specificaion s fi. 17 The calculaion of he SPI is based on modeling he probabiliy disribuion of precipiaion as derived from long erm records by fiing hese o a gamma disribuion via maximum likelihood. An imporan componen in his regard is he chosen ime scale. Since we are ineresed in cropland produciviy and soil moisure condiions are known o respond o precipiaion anomalies over a relaively shor ime period, we use a 12 monh scale. See hp:// 21

24 ending once he index become posiive (negaive) again. For each ime period we hen calculae he number of monhs of exreme dryness (weness). The corresponding consruced variables are DRY and WET, respecively. To capure he effec of emperaure, in paricular wih respec o is imporance for agriculure, we consruc a measure of reference evaporanspiraion (ET) o represen he evaporaive demand of he air wihin a basin from emperaure daa following Hargreaves and Samani (1985). Since he effecs of rainfall shorages and abundance on local agriculure are likely o some exen o depend on he local evaporaive demand, we also allow for ineracions beween ET and WET and DRY. To consruc all hese climaic facors a he regional level we resor o informaion from he Iner-Governmenal Panel on Climae Change (IPCC) climaic daa se, which provides monhly precipiaion and emperaure measures across he globe a he 0.5 degree level over he enire 20h cenury. We use hese o calculae ou ime varying averages wihin provinces. The resuls of esimaing (26) for he semi-annual regional ou- and in-migraion raes, conrolling for regional specific fixed effecs and region common ime specific facors are given in Table 2. Moreover, we calculae Driscoll and Kray (1998) sandard errors correced for spaial correlaion hroughou. As can be seen, for boh of inflow and ouflow raes, he se of climaic variables are almos all significan, producing highly significan F-ess of join significance. Examining he individual facors, one finds ha for he precipiaion relaed facors he signs mee a priori expecaions. More specifically, one finds ha exremely dry as well as exremely we weaher, indicaive of drough and flood like condiions, respecively, ac o increase overall ouflow from regions. Moreover, he negaive impac of rainfall shorage is furher exacerbaed by a high evaporanspiraive demand of he air. Somewha surprisingly, he direc effec of evaporanspiraion is o reduce ouflow from a region, alhough in absolue erms his impac is small. For he inflow rae, one finds ha exremely we periods end o reduce he inflow rae, while droughs have no significan effec. 22

25 Furhermore, a high evaporanspiraive demand of he air ends o reduce he effec of he laer. Surprisingly one finds ha his demand on is own acs o increase person flowing o he region, alhough again no subsanially so. To consruc he prediced inward and ouward migraion raes by sub-group we proceeded in similar manner as for he overall sample, excep resricing consrucion via (26) hrough (29) o he sub-sample in quesion. We repor he esimaion for (26) for he ouflow and inflow raes in Table 2, respecively. As can be seen, for he ouflow rae all climaic variables are significan, where he signs are in congruence wih he overall sample. Unsurprisingly he join F-ess aess o heir power as predicive facors. For he inflow raes, he majoriy of coefficiens are significan and similar o hose from he overall sample. Similarly, he F-es saisics provide evidence of heir predicive power. In erms of esimaing (28), since his involves esimaing differen specificaions for each region, we only provide a brief ouline of he resuls. One may wan o firs noe ha since our disance measures do no vary over ime, our esimaed specificaion in (28) does no conrol for region specific effecs, bu does include a se of ime dummies o conrol for common region ime specific facors deermining he migraion flows. We used Driscoll and Kray (1998) sandard errors correced for spaial correlaion as we did for (26). For each region specific regression, we, afer esimaing he parameers on disance conduced an F- es of he null hypohesis ha hese were joinly zero. In he case of ou-migraion raes for only 4 regions, while in he case of in-migraion raes for only 6 could he null hypohesis no be rejeced. As wih he overall sample he F-es of he disance variables suggesed srong predicive power in almos all cases for he esimaion of (28) for subgroups. III.2 Non-Compliance and Ne Migraion We urn o examining how migraion flows affec he probabiliy of workers daily wage being minimum wage complian, conrolling for oher facors. As oher conrol variables we 23

26 include all relevan variables as available from he TLFS. More specifically, in all specificaions we include age and is squared value, hours and hours squared, 3 marial saus dummies, 12 educaional caegory dummies, 9 occupaion dummies, 9 indusry dummies, 72 province dummies, 20 wave dummies, and 7 employer size dummies. The resuls of a probi model including he non-insrumened ne inflow rae of migrans for he oal daily wage sample is shown in he firs column of Table 3. Accordingly, he ne inflow rae of migrans has no significan effec on he probabiliy of working in a minimum wage non-complian job, where he coefficien is convered o he marginal effec. We nex insrumen for he ne inflow rae of migraion wih he insrumens described above, as depiced in he second column of Table 3. Examining he firs sage i is apparen ha our insrumens, he consruced migraion inflow and ouflow raes significanly predic ne migraion. As a maer of fac, a Wald es suggess ha hese are srong predicors of he observed ne migraion rae. Examining he coefficien on (insrumened) ne migraion rae one discovers ha here is now a posiive and significan effec on he probabiliy of noncompliance. This underlines he imporance of aking accoun of he likely endogeneiy of migraion in local labour markes. The observed marginal effec suggess ha a 10 percenage poin increase in ne migraion increases he probabiliy of working in a noncomplian job by 1.2 percenage poins. In he hird column we reduce our sample o low skilled workers. Again, he firs sage resuls ha he consruced insrumens are reasonable predicors of he rae of ne migraion. The observed (insrumened) marginal effec is sligh larger han for he overall sample, where a 10 percenage poin raises he probabiliy of no being paid he minimum wage by 1.5 percenage poins. Thus far we have used a fairly conservaive error band around he minimum wage. In he las wo columns we hus, as a robusness check, widen his band in ha any daily wages 24

27 wihin 5 per cen of he minimum wage would be considered as complian. As can be seen, widening he band does no aler our resuls qualiaively, bu as migh be expeced reduces he esimaed effec by 27 and 32 per cen for he oal and low skilled sample, respecively. IV. Conclusion In his paper used a monopsony model where workers are homogenous and here is variaion in firm produciviy o show ha ha in response o a small increase in migraion employmen will increase in boh low produciviy non-complian firms who pay less han he minimum wage, as well as in high produciviy firms who pay more han he minimum wage. In conras, employed increases by proporionaely more in minimum wage firms who are consrained by he labour supply curve. Using daa from Thailand we provide evidence ha increases in inward ne migraion are indeed associaed wih a proporionaely greaer increase in employmen a han below he minimum wage. I migh be argued ha he imporance of he resuls we presen here may be of limied imporance given ha in many developing counries in paricular, non-compliance wih he minimum wage is widespread. However, summarising he evidence on minimum wage from developing counries Freeman (2010) suggess ha in many developing counries, minimum wages raise he pay of low-paid workers in he formal secor adequaely o produce spikes in he disribuion of earnings and ha changes in he minimum change he wages for low-paid covered groups. Tha is even for counries wih subsanial non-compliance, as is he case for Thailand as we demonsraed here, in many such counries minimum wages are binding for a subsanial groups of workers. Given ha mos counries have binding minimum wages and he large and increasing scale of labour flows, he model in his paper may help us provide a more complee undersanding of he impac of migraion flows on he hos economy 25

28 The resuls in he paper also provide evidence supporing a non-compeiive model of he labour marke. Clearly his also has imporan implicaions for policy. For example Freeman (2010) suggess ha an overly simplisic heoreical framework led many inernaional organisaions o give damaging advice o developing counries wih an excessive focus on deregulaion of he labour marke, while Manning (2003) spells ou he implicaions of he Monopsony model of he labour marke over a wide range of issues. 26

29 References Ashenfeler, Orley C., Henry Farber and Michael R. Ransom (2010). Labor Marke Monopsony Journal of Labor Economics, vol. 28, no. 2 Bhaskar, V., and To, T. (1999) Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonisic Compeiion. ECONOMIC JOURNAL, Vol. 109 (April), pp Borjas, George J. (1996) Labor Economics, Inernaional Ediion, McGraw Hill Bousan, L. P., V. Fishback, and S. Kanor, The effec of inernal migraion on local labor markes: American ciies during he grea depression, Journal of Labor Economics, Vol. 28, No. 4, pp Brown, Charles; Gilroy, Curis; and Kohen, Andrew (1982). The Effec of he Minimum Wage on Employmen and Unemploymen. Journal of Economic Lieraure 20 (June): Card, David and Alan B. Krueger (1995) Myh and Measuremen: The New Economics of he Minimum Wage, Princeon Universiy Press, 1995 Dickens, Richard, Sephen Machin and Alan Manning (1999) The Effecs of Minimum Wages on Employmen: Theory and Evidence from Briain, Journal of Labor Economics, vol. 17, no. 1 Driscoll, J.C. and A.C. Kraay, Consisen Covariance Marix Esimaion wih Spaially Dependen Panel Daa, Review of Economics and Saisics, Vol. 80, No. 4, pp Freeman, Richard B. (2010) Labor Regulaions, Unions, and Social Proecion in Developing Counries: Marke Disorions or Efficien Insiuions? Handbook of DevelopmenEconomics, Chaper 70. Elsevier Giuliano, Laura (2013) MinimumWage Effecs onemploymen, Subsiuion, and Teenage Labor Supply: Evidencefrom Personnel Daa Journal of Labor Economics, vol. 31, no. 1 Gordon H. Hanson (2010). Inernaional Migraion and he Developing World, Handbook of Developmen Economics, chaper 66, Elsevier. Hargreaves, G.H. and Z.A. Samani, Reference crop evaporanspiraion from emperaure, Applied Engineering in Agriculure, Vol. 1, No. 2, pp Hirsch, Boris and Elke J. Jahn (2012) Is here monopsonisic discriminaion agains immigrans? Firs evidence from linked employer-employee daa, Diskussionspapiere, Universiä Erlangen-Nürnberg, Lehrsuhl für Arbeismark- und Regionalpoliik, No. 79 Hochkiss, Julie L. and Myriam Quispe-Agnoli (2012) Employer Monopsony Power in he Labor Marke for Undocumened Workers Working Paper d, Federal reserve Bank of Alana 27

30 Manning, A. (2003). Monopsony in Moion, Imperfec Compeiion in Labor Markes Princeon Universiy Press McKee, T, N. Doesken and J. Kleis, The relaionship of drough frequency and duraion o ime scales. Preprins, 8h Conference on Applied Climaology, pp January 17-22, Anaheim, California. Srobl, E.,Walsh, F. (2011) 'The ambiguous effec of minimum wages on hours'. Labour Economics, 18 : (2003) 'Minimum wages and compliance: The case of Trinidad and Tobago'. Economic Developmen and Culural Change, 51 (2): Walsh,F., (2003) 'Commen on Minimum wages for Ronald McDonald Monopsonies: A Theory of Monopsonisic Compeiion'. Economic Journal, 113 (489): Figure 1: An increase in migraion wih a modes minimum wage Wage Marginal cos of labour Labour supply w w m Labour Demand Labour 28

31 m 1 l l l 29

32 0 Densiy Figure 2: Disribuion of Salary/Minimum Wage Complian Secors rmin 30

33 0 Densiy Figure 3: Disribuion of Salary/Minimum Wage Non-Complian Secors rmin 31

34 Table 1: Summary Saisics Variable Mean Sandard Deviaion Non-Compliance: All Firms ??? employees ??? employees ??? employees ??? employees ??? employees ??? employees ??? employees Salary: Low-skilled: Inflow Rae: Ouflow Rae: NeFlow Rae: Table 2: The Effec of Weaher on Inflow and Ouflow Raes (1) (2) (3) (4) Dep. Variable: Inflow Inflow Ouflow Ouflow DRY ** ** * * ( ) ( ) ( ) ( ) WET * * ** ** ( ) ( ) ( ) ( ) EVAPO ** ** ** ** ( ) ( ) (7.61e-05) (8.85e-05) EVAPO*WET -8.68e e e-05** 2.54e-05** (6.42e-06) (5.34e-06) (7.25e-06) (7.64e-06) EVAPO*DRY -9.25e e e-05* 2.14e-05* (1.10e-05) (7.63e-06) (7.68e-06) (9.34e-06) Sample All Low-Skilled All Low-Skilled Observaions 1,440 1,440 1,440 1,440 Provinces F-es 18.15** 31.16** 9.028** 8.172** Noes: (i) Driscoll and Kray (1998) sandard errors correced for spaial and auocorrelaion in parenheses; (ii) ** and * are 1 and 5 per cen significance levels; (iii) year and binannual dummies included bu no repored; (iv) F-es is es of join significance of he climaic variables. 32

35 Table 3: Non-Compliance and Ne Migraion (1) (2) (3) (4) (5) Neflow Rae ** ** ** ** (0.078) (3.467) (3.915) (3.219) (4.065) Firs Sage : Inflow Rae * 8.878** * 8.500* (7.253) (3.620) (7.16) (3.863) Ouflow Rae ** ** ** ** (7.735) (3.518) (7.935) (3.677) Sample : All All Low Skilled All Low Skilled Obs. : Wald-saisic ** 11.58** 5.61** 5.54** Noes : (1) ** and * indicae 1 and 5 per cen significance levels; (2) The coefficien on he ne migraion rae is he marginal effec; (3) The Wald-saisic is a join es of he significance of he insrumens in he firs sage; (4) Conrol variables include age, age squared, hours, hours squared, 4 marial saus dummies, 12 educaion dummies, 9 indusry dummies, 9 occupaion dummies, 7 firm employer size dummies, 72 province dummies, and 20 wave dummies. 33

36 Appendix In his Appendix we show ha in response o a change in migraion he percenage dw fall in wages a a non-complian firm will be less han uniy: 1. This means ha he d w proporionae change in employmen a a non-complian firm given in equaion (15) will be posiive bu less han he proporionae change in a supply consrained complian firm given in equaion (22). A non-complian firm could op o hire he same number of workers ha hey hire in equilibrium, bu pay hem he minimum wage and avoid he possibiliy of deecion. Since non-complian firms choose no o do his i mus be ha he profi of being non-complian is higher han he profi of hiring he same number of workers a he minimum wage. We n denoe he wage paid by a non-complian firm in equilibrium as: w. Equaion (9) gives he profi earned by a non-complian firm paying his wage. This is greaer han deviaing o he minimum wage (in which case he probabiliy of deecion q is zero) if he following condiion holds: or n w w n > q( w ) n ( w w A) n n2 n n n n n PF( w ) w q( w )[( w w A) w ] > PF( w ) w w (30) Since we assume ha A w w in equaion (13) and n w w by he definiion of noncompliance, equaion (26) implies ha if a firm chooses o be non-complian: n 1 q( w ) (31) 2 and second order condiions and cross parial erms are respecively: 34