The Effects of the Minimum Wage on Wages, Employment and Prices

Transcription

1 DISCUSSION PAPER SERIES IZA DP No The Effecs of he Minimum Wage on Wages, Emloymen and Prices Sara Lemos May 2004 Forschungsinsiu zur Zukunf der Arbei Insiue for he Sudy of Labor

2 The Effecs of he Minimum Wage on Wages, Emloymen and Prices Sara Lemos Universiy of Leiceser and IZA Bonn Discussion Paer No May 2004 IZA P.O. Box Bonn Germany Phone: Fax: Any oinions exressed here are hose of he auhor(s) and no hose of he insiue. Research disseminaed by IZA may include vies on olicy, bu he insiue iself akes no insiuional olicy osiions. The Insiue for he Sudy of Labor (IZA) in Bonn is a local and viual inernaional research cener and a lace of communicaion beeen science, oliics and business. IZA is an indeenden nonrofi comany suoed by Deusche Pos World Ne. The cener is associaed ih he Universiy of Bonn and offers a simulaing research environmen hrough is research neorks, research suo, and visiors and docoral rograms. IZA engages in (i) original and inernaionally comeiive research in all fields of labor economics, (ii) develomen of olicy conces, and (iii) disseminaion of research resuls and conces o he ineresed ublic. IZA Discussion Paers ofen reresen reliminary ork and are circulaed o encourage discussion. Ciaion of such a aer should accoun for is rovisional characer. A revised version may be available on he IZA ebsie (.iza.org) or direcly from he auhor.

3 IZA Discussion Paer No May 2004 ABSTRACT The Effecs of he Minimum Wage on Wages, Emloymen and Prices This aer us ogeher evidence for he ages, emloymen and rice effecs of he minimum age. This overall icure ill hel o undersand he small emloymen effecs revalen in he lieraure in he ligh of rice effecs. The daa used is an under-exlored monhly Brazilian household survey from 1982 o 2000, similar o he US CPS. As he inernaional lieraure on he minimum age is scany on non-us emirical evidence, in aicular on develoing counries, his aer ill also hel o exend he curren undersanding on he effecs of he minimum age in develoing counries. This is crucial if he minimum age is o be used as a olicy o hel oor eole in oor counries. JEL Classificaion: J38 Keyords: minimum age, age effec, emloymen effec, rice effec, cos shock, ass-hrough, Brazil Sara Lemos Economics Deamen Universiy of Leiceser Universiy Road Leiceser LE1 7RH Unied Kingdom Tel.: Fax: sl129@leiceser.ac.uk

4 1. Inroducion The minimum age hels he oor if i increases ages and does no desroy jobs or cause inflaion. Thus, he main conribuion of his aer is o u ogeher evidence for he ages, emloymen and rice effecs of he minimum age. This overall icure ill hel o undersand he small emloymen effecs revalen in he lieraure (Bron, 1999) in he ligh of rice effecs. The rice effec evidence rovided is, in urn, anoher main conribuion o a very under researched area. The daa used is an under-exlored monhly Brazilian household survey from 1982 o 2000, similar o he US CPS. As he inernaional lieraure on he minimum age is scany on non-us emirical evidence, in aicular on develoing counries, anoher main conribuion of his aer is o exend he curren undersanding on he effecs of he minimum age in develoing counries. This is crucial if he minimum age is o be used as a olicy o hel oor eole in oor counries. Wage Effecs I is ell esablished in he inernaional lieraure ha minimum age increases comress he ages disribuion (Bron, 1999). As a resul, he olicy debae hinges on heher emloyers facing he associaed higher labour coss resond by reducing rofis, reducing emloymen, or raising rices. Profi Effecs The emirical evidence o suo he assumion ha firms reduce rofis folloing a minimum age increase is very limied (Card and Krueger, 1995), bu economic heory suggess ha his does no occur. Lo age firms oerae in comeiive markes and are no able o absorb he exra coss. Emloymen Effecs There is no consensus in he exensive emirical lieraure on emloymen effecs, hich imlicily assumes ha ouu rices are given on a comeiive marke, and ha firms loer emloymen as a resul of a minimum age increase (Bron, 1999). Resuls consisen ih he redicion of a negaive emloymen effec conflic ih resuls ha challenge such a redicion. Noneheless, small emloymen effecs, clusered around zero, are becoming revalen in he lieraure (Freeman, 1994 and 1996; Bron, 1999). Price Effecs Alhough much aenion has been devoed o reconciling he heoreical redicion of emloymen decrease ih he available emirical evidence (Card and Krueger, 1995; Bron, 1999), lile aenion has been aid o he heoreical redicion ha an indusry ide cos shock ill be assed hrough o rices. The assumion of consan rices is reasonable for an indusry here firms affeced comee ih firms no affeced by he increase. Hoever, an increase

5 in he minimum age reresens an indusry ide increase in coss. I is hen crucial o assume ha emloymen is given, and ha firms raise heir rices in resonse o a minimum age increase. Wih emloymen and rofis no significanly affeced, higher rices is an obvious resonse o a minimum age increase. Noneheless, here is very lile evidence on rice effecs in he lieraure, and none hasoever for develoing counries (Bron, 1999; Lemos, 2004a). The limied emirical evidence for Brazil is in line ih he inernaional lieraure and i indicaes ha an increase in he minimum age comresses he age disribuion and has a small adverse emloymen effec (Carneiro, 2002; Corseuil and Servo, 2002). This aer follos recen srands in he inernaional lieraure and discusses a number of conceual and idenificaion quesions. I esimaes he effec of he minimum age a various oins hroughou he age disribuion; i uses an emloymen decomosiion o searaely esimae he effec of he minimum age on he number of hours orked and on he number of jobs; i hen esimaes rice effecs, filling a ga in he lieraure. Robus resuls indicae ha he minimum age srongly comresses he ages disribuion, has small adverse effecs on emloymen, and raises overall rices in Brazil. 2. Analysis The daa used is PME (Monhly Emloymen Survey), a roaing anel daa for six Brazilian meroolian regions beeen 1982 and 2000, similar o he US CPS (Curren Poulaion Survey). The PME, ogeher ih he rice daa, IPC (Consumers Price Index), and he nominal minimum age daa, is available from IBGE (Insiuo Brasileiro de Geografia e Esaisica). Over he samle eriod, he nominal minimum age as naional, is coverage as full, and is adjusmens ere according o he indexaion rules of successive sabilizaion lans, hich ulimaely deended on he inflaion level. The correlaion of he difference of he log nominal hourly minimum age and he difference of he log 10 h (90 h ) ercenile of he nominal hourly age disribuion is 0.11 (0.05), suggesing ha he minimum age is more srongly correlaed ih ages a he boom of he disribuion. The correlaion of he difference of log nominal hourly minimum age and he difference of log emloymen rae is 0.05, offering lile suo for a negaive emloymen effec of he minimum age. The correlaion of he difference of log nominal hourly

6 minimum age and he difference of log rice is 0.55, suggesing ha he minimum age affecs rices osiively. As in Lemos (2004b), a simle emirical age equaion, grounded on he sandard heory, is delivered by a labour marke equilibrium reduced form equaion: log u (1) W = α + β log MW + γ inf laion 1 + δ urae 1 + λ X + f r + f + here W is nominal hourly average ages in region r and monh, r =1,..., 6, and =1,..., 214 ; MW is nominal hourly minimum age; inf 1 laion is as inflaion; urae 1 is as unemloymen rae; f r and f are region and ime fixed effecs modelled by region and ime dummies; u i is he error erm; and X are labour suly shifers, ie. he rooion of orkers in he oulaion ho are: young, younger han 10 years old, omen, illieraes, reired, sudens, in urban areas, in he ublic secor, in he building consrucion indusry, in he meallurgic indusry, basic educaion degree holders, high school degree holders, and ih a second job. This equaion can be esimaed no only using average ages, bu also he 10 h, 20 h, 30 h, 40 h, 50 h and 90 h erceniles, heir raios, and he sandard deviaion of he age disribuion. This makes i ossible o esimae he effec of he minimum age hroughou he age disribuion (Dickens e al., 1999). Because he nominal minimum age does no vary across regions, he fracion of orkers a he minimum age in he age disribuion (lus or minus 0.02% o accoun for rounding aroximaions) is used as he minimum age variable in Equaions (1), (2) and (3) (Dolado e al, 1996), as i is no sandard in he lieraure (Bron, 1999). Even hough fracion a has variaion across regions and over ime, modelling ime effecs ih a full se of ineracions of (12) monh and (16) year dummies ould eliminae all he variaion ha idenifies he minimum age effec. Tha is because he variaion in he minimum age (and associaed variaion in fracion a ) is no indeenden of he variaion in he ime dummies, since he minimum age is sysemaically increased on a aicular monh (mosly May). To reserve he relevan variaion, only he ineracion of (11) monh and (16) year dummies, excluding he May ineracion bu including a monh May dummy, are included o model macro shocks in each ime eriod and seasonally in May. Table 1 shos osiive esimaes, more robus and larger a loer erceniles, suggesing ha he minimum age comresses he age disribuion. A 10% increase in he minimum age increases he age of hose in he 10 h (20 h ) ercenile by 0.80% (0.40%), and decreases he 90 h -

7 10 h ercenile ga by 0.91%, decomosed ino a decrease in he 50 h -10 h ga of 0.92% and an increase in he 90 h -50 h ga of 0.01%. 1 Sillovers for Brazil exend relaively higher in he age disribuion han for oher counries for hich emirical evidence is available (Bron, 1999). The counera emirical emloymen equaion, as in Lemos (2004b), is: log N 24 e e e e 1 + λ X + ρ l log N 1 + f r + f + l = 1 e e e e = α + β log MW + γ inf laion u (2) here N is aken in urn o mean average hours in he oulaion (T ), average hours for hose orking ( H ) and he emloymen rae ( E ). Equaion (2) is searaely esimaed using each of he hree emloymen variables (T, H and E ) in urn as deenden variables. Thus, he esimae of he minimum age in he T equaion equals he sum of he esimaes of he minimum age in he e e e H and E equaions, i.e. β T = β H + β E. 2 This makes i ossible o decomose he oal effec of a minimum age increase on emloymen ino hours effec and jobs effec (Lemos, 2004b). Table 2 shos osiive and significan oal and hours esimaes as ell as non-significan jobs esimaes; he oal effec aears o be dominaed by he hours raher han he jobs effecs. This suggess ha he minimum age does no hu as much here i hus he mos: causing disemloymen. A 10% increase in he minimum age increases oal emloymen by %, decomosed ino a % increase in he number of hours orked and a % decrease in he number of jobs. In he long run, oal emloymen decreases by 0.04%. Robusness checks, here Equaion (2) is re-esimaed in levels, sho similar esimaes, erhas suggesing a slighly more (less) adverse effec in he sho (long) run. The emloymen effec for Brazil is small hen 1 The esimaes of fracion a ere mulilied by 0.3 o obain he effec of a 10% increase in he minimum age. The 0.3 facor as obained by regressing he difference of fracion a on he difference of he log of nominal hourly minimum age and conrols associaed o each emirical equaion. Because he nominal minimum age does no vary across regions, i as normalized by he average ages (and also by he median age, 25 h and 10 h ercenile age). The 0.3 esimae as remarkably robus across secificaions. The inuiion is given by a deerminisic model here y 1 = a + 1 b x, y = a + b z, z = a + b x and b 1 = b2b, 3 b 1, b2, b3 0 (Lemos, 2004b). 2 Because of dynamics, he se of regressors is no he same in all hree equaions and he OLS addiiviy roey does no hold exac. To reserve he decomosiion, lagged T, hich embodies he variaion of H and E, as used in all hree equaions ihou affecing he robusness of he esimaes (Lemos, 2004b).

8 comared o he -1% effec in he inernaional lieraure (Bron, 1999) and given he evidence of sizeable age effecs. As in Lemos (2004c), a simle emirical rice equaion, grounded on sandard heory, is delivered eiher by a general equilibrium reduced form equaion solved for rices, or by inveing he imerfec comeiion rofi maximizing equaion. Consider he folloing model: 6 P = α + β logmw + β logmw 1 + γ W + δ r + ς C + κ K + λ Zs + fr + f + = 1 log u (3) here P i is log rices; r i is nominal ineres rae; C i is average coss; K i is caial; and Z i is labour suly shifers, as above, and aggregae demand shifers, hich include consumion, Governmen exendiure, axes, caial invesmen, imos and exos. The emirical counera of he general equilibrium equaion is obained if he imerfec comeiion equaion, if α, β, β, α, γ, β, β, δ, and δ, κ, and ς are nonzero. λ are nonzero, and Table 3 shos osiive and significan esimaes, suggesing aial ass-hrough. A 10% increase in he minimum age increases rices by 0.37% (0.97%-1.17%) in he sho (long) run. Robusness checks sho similar bu smaller esimaes, here Equaion (3) is re-esimaed assuming he roducion funcion o be Y=f L (L), insead of Y=f LK (L,K), in hich case δ and κ are zero. The overall long run rice effec for Brazil is large, bu he sho run effec is comarable o he 4% food secor rice effec and he 0.4% overall rice effec in he inernaional lieraure (Lemos, 2004a). I is also consisen ih he evidence of modes emloymen effecs and sizeable age effecs. All models ere Whie-correced and samle size eighed, o accoun for he relaive imoance of each region (and for heeroskedasiciy arising from aggregaion). Serial correlaion as assumed o vanish afer differencing, adding dynamics, conrols, regional and ime dummies. 3 3 The resuls ere robus o SUR esimaion. GMM a la Arellando and Bond (1991) is no an oion because T>N. Lemos (2003) shos ha any endogeneiy coming from he simulaneous deerminaion of sike and emloymen is no oo severe and ha OLS esimaes are robus o GMM esimaion using a number of insrumens for fracion a.

9 3. Conclusions Desie of much effo o reconcile he available emirical evidence ih he heoreical redicion of emloymen decrease folloing a minimum age increase, very lile effo has been devoed o sudy he heoreical redicion ha such an indusry ide cos shock ill be assed hrough o rices. Firms ill no incur any in emloymen adjusmen coss if hey are able o ass hrough o rices he higher coss associaed o a minimum age increase. The evidence here is an imoan conribuion o he lieraure because i hels o reconcile his debae. Sandard economic heory is no hu if age increases do no cause emloymen decrease bu cause rice increases. Tha is ha he evidence here suggess: an increase in he minimum age srongly comresses he ages disribuion, has small adverse effecs on emloymen, and raises overall rices in Brazil. In oher ords, he minimum age increases he ages of lo aid orkers, does no desroy many jobs and causes some rice inflaion. Moreover, he evidence here is also an imoan conribuion o he lieraure because i hels o undersand he effecs of he minimum age in develoing counries. The main message here is ha age and rice effecs in Brazil are large hereas emloymen effecs are small. Small emloymen effecs are sensible no only hen large rice effecs are uncovered, bu also hen a number of oher secificiies inheren o develoing counries are considered. For examle, emloymen effecs ould no be oo adverse in an economy here: non-comliance is large and he ublic secor has an inelasic labour demand (Lemos, 2004d and 2004e; Neumark e al, 2003; Fajnzylber, 2001); inflaion is high and firms do no adjus emloymen because hey erceive he minimum age increase as emorary (Lemos, 2004f); lo age orkers are a large rooion of he labour force (Lemos, 2004g). Such secificiies sugges ha he economics of he minimum age in develoing migh be very differen from ha of develoed counries. To exend he curren undersanding of minimum age effecs in he former is crucial if he minimum age is o be used as a olicy o hel oor eole in oor counries. References ARELLANO, M., and S. BOND (1991): "Some Tess of Secificaion for Panel Daa: Mone Carlo Evidence and an Alicaion o Emloymen Equaions," Revie of Economic Sudies, 58, BROWN, C. (1999): "Minimum Wages, Emloymen, and he Disribuion of Income," in Handbook of Labor

10 Economics, ed. by O. Ashenfeler, and D. Card. Amserdam; Ne York and Oxford: Elsevier Science, Noh- Holland, CARD, D. E., and A. B. KRUEGER (1995): Myh and Measuremen: The Ne Economics of he Minimum Wage. Princeon: Princeon Universiy Press. CARNEIRO, F. G. (2002): "Uma Resenha Emirica Sobre Os Efeios Do Salario Minimo No Mercado De Trabalho Brasileiro," Unublished Paer. CORSEUIL, C. H., and L. SERVO (2002): "Salario Minimo E Bem Esar Social No Brasil: Uma Resenha Da Lieraura," Unublished Paer. DICKENS, R., S. MACHIN, and A. MANNING (1999): "The Effecs of Minimum Wages on Emloymen: Theory and Evidence from Briain," Journal of Labor Economics, 17, DOLADO, J., and ET AL. (1996): "The Economic Imac of Minimum Wages in Euroe," Economic Policy: A Euroean Forum, 23, FAJNZYLBER, P. (2001): "Minimum Wage Effecs Throughou he Wage Disribuion: Evidence from Brazil's Formal and Informal Secors," Anais do XXIX Enconro Nacional de Economia. FREEMAN, R. (1994): "Minimum Wages--Again!" Inernaional Journal of Manoer, 15, (1996): "The Minimum Wage as a Redisribuive Tool," Economic Journal, 106, LEMOS, S. (2003): Poliical Variables as Insrumens for he Minimum Wage, UCL Working Paer, (2004a): The effec of he Minimum Wage on Prices, Universiy of Leiceser Discussion Paer, 04/7. (2004b): Are Wage and Emloymen Effecs Robus o Alernaive Minimum Wage Variables?, Universiy of Leiceser Discussion Paer, 04/4. (2004c): The Effecs of he Minimum Wage on Prices in Brazil, Universiy of Leiceser Discussion Paer, 04/6. (2004d): The Effecs of he Minimum Wage in he Formal and Informal Secors in Brazil, Universiy of Leiceser Discussion Paer, 04/8. (2004e): The Effecs of he Minimum Wage Across he Privae and Public Secors in Brazil, Unublished Paer. (2004f): The Effecs of he Minimum Wage on Wages, Emloymen and Prices in Brazil in Periods of High and Lo Inflaion, Unublished Paer. (2004g): Minimum Wage Effecs across Poulaion Grous in Brazil, Unublished Paer. NEUMARK, D., W. CUNNINGHAM, and L. SIGA (2003): "The Disribuional Effecs of Minimum Wages in Brazil: ," Unublished Paer.

11 Table 1 - WAGE EFFECT Deenden Variable coef se 10h ercenile h ercenile h ercenile h ercenile h ercenile h ercenile mean h/10h ercenile raio h/10h ercenile raio h/50h ercenile raio sandarddeviaion ) The deenden variable is seleced erceniles, raios of erceniles and sandard deviaion of he ages disribuion. The minimum age variable is "fracion a". 2) Time effecs are modeled ih ineracions of year and seasonal-monh dummies (he seasonal-monh May dummy is no ineraced). Labour suly shifers are included as conrols. 3) The esimaes ere mulilied by 0.3 o obain he effec of a 10% increase in he minimum age. Table 2 - EMPLOYMENT EFFECT sr lr Deenden coef se coef Variables (1) (2) Firs Difference Toal Effec Hours Effecs Jobs Effec Levels Toal Effec Hours Effecs Jobs Effec ) The deenden variable is average hours orked for he labour force, average hours orked for hose emloyed and emloymen rae. Hours and Job elasiciies add o Toal elasiciy. The minimum age variable is "fracion a". 2) Time effecs are modeled ih ineracions of year and seasonal-monh dummies (he seasonal-monh May dummy is no ineraced). Labour suly shifers are included as conrols. 3) Columns 1 and 2 sho he sho and long run coefficien. 4) The o and boom anels resen esimaes for he model in levels and in firs-differences. 5) The esimaes ere mulilied by 0.3 o obain he effec of a 10% increase in he minimum age. Table 3 - PRICE EFFECT Models sr lr coef se coef (1) (2) Y=f LK (L,K) General Equilibrium Imerfec Comeiion Y=f L (L) General Equilibrium Imerfec Comeiion ) The deenden variable is he difference of logs of rices. The minimum age variable is "fracion a". 2) Time effecs are modeled ih ineracions of year and seasonal-monh dummies (he seasonal-monh May dummy is no ineraced). Labour suly shifers and aggregae demand shifers are included as conrols. 3) Columns 1 and 2 sho he sho and long run coefficien. 4) The o and boom anels resen esimaes for o differen roducion funcions. 5) The esimaes ere mulilied by 0.3 o obain he effec of a 10% increase in he minimum age.