Effect of minimum wages: do regional data tell a different story?

• Thesis title in Czech: Effects of minimum wages: do regional data tell a different story?
• Thesis title in English: Effect of minimum wages: do regional data tell a different story?
• Key words: minimální mzdy, zaměstnanost, disponibilní příjmy, riziko chudoby, panelová data, NUTS2, porovnání
• English key words: minimum wages, employment effect, disposable income, risk of poverty, panel data, NUTS 2 regions, comparison
• Academic year of topic announcement: 2015/2016
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 23.05.2016
• Date of assignment: 23.05.2016
• Date and time of defence: 21.06.2017 08:30
• Venue of defence: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Date of electronic submission: 18.05.2017
• Date of proceeded defence: 21.06.2017
• Opponents: Mgr. Barbara Pertold-Gebicka, M.A., Ph.D.

Guidelines

The minimum wages change over time and their levels also differ across the European countries. At the moment, minimum wage levels are set in 22 EU countries: in 16 of those, minimum wages are set on a national level, in 5 they are based on collective agreements for specific sectors and in Cyprus, they are set for specific occupations (Eurostat, 2016). There are a lot of aspects that affect the minimum wage levels and that are affected by them: for example GDP, employment and price levels. But those aspects are specific not only on a country level but also on a smaller, regional level.

The effect of the introduction or change in minimum wages on other macroeconomic variables, especially on unemployment has been quite popular in the economic literature (for example Boockman, 2010; Fialová, 2006; Dolado et al., 2006). But the authors are focused mainly on the country-level data, not considering the effect of price levels within the countries. The explanation for that may simple be the lack of the information about regional price levels – they have been so far estimated only in six European countries: Austria, Germany, Italy, Slovakia, UK and Czech Republic.

I would like to use the estimated the price levels of NUTS 2 regions of the EU from last year’s paper of Janský and Kolcunová (2015) to re-estimate the socio-economic indicators (or use the ones already re-estimated – there is a paper about this topic that is going to be published very soon) and see if the effect of change or introduction of minimum wages on the adjusted variables (such as GDP, employment or income) differs from the effects estimated with non-adjusted variables. I am mainly interested in answering following questions:
Do the specific regional data change the known relationship between minimum wages and macroeconomic variables? Or in other words, is it necessary to include region-specific data in the estimation of the relationship?
Is there any effect of the minimum wages on the creation of new job positions?
Are there some other significant effects between regional levels of minimum wages and different macroeconomic variables?

References

Aaronson, D., French, E., Sorkin, I. (2015). Firm dynamics and the minimum wage: A putty-clay approach. Working Paper 2013-26, Federal Reserve Bank of Chicago
Boockmann, B. (2010). The combined employment effects of minimum wages and labor market regulation: A meta-analysis. IZA Discussion Paper No. 4983.
Card, D. (1992). Using regional variation in wages to measure the effects of the federal minimum wage. Industrial & Labor Relations Review, 46(1), 22-37
Dolado, J. et al. (1996). The economic impact of minimum wages in Europe. Economic Policy, October 1996, 23, 319-372.
Ferragina, A. M., & Pastore, F. (2008). Mind the gap: unemployment in the new EU regions. Journal of Economic Surveys, 22(1), 73-113.
Janský, P., Kolcunová, D. (2015). Regional differences in price levels across the European Union and their implications for its regional policy. Mimeo. 
Meer, J., West, J. (2015). Effects of the Minimum Wage on Employment Dynamics. Journal of Human Resources, early publication online.
Sorkin, I. (2015). Are there long-run effects of the minimum wage? Review of Economic Dynamics 18, 306–333.
The Economist (2015). Destination unknown. The Economist. 
Visser, J. (2013). ICTWSS: Database on Institutional Characteristics of Trade Unions, Wage Setting, State Intervention and Social Pacts in 34 countries between 1960 and 2012, Version 4. Amsterdam: Amsterdam Institute for Advanced Labour Studies AIAS.

Preliminary scope of work

1 Hypothesis #1: Low price levels imply high minimum wages.
2 Hypothesis #2: An increase of the minimum wage level does not have a significant impact on employment.
3 Hypothesis #3: An increase of the minimum wage level in EU regions is strongly correlated to GDP adjusted for price levels.

Preliminary scope of work in English

Methodology

Even though the effect of the introduction or change in minimum wages on other macroeconomic variables has been quite popular in the economic literature, there is not a unique view on this relationship. One group of the authors believe that increase in minimum wage level affect the unemployment negatively, especially when talking about the youngest, nonqualified teenage workers (for example Deere et al., 1995; Fialová, 2006; Baker et al. 1997). Authors in the second group have proven that the employment is not affected by the growth of minimum wages, moreover when considering particular age groups, the effect can even be positive (e.g. Card & Krueger, 1995, 1998; Machin & Manning, 1994; Dolado et al., 1996). Many people feel that the negative impact of minimum wage increase on unemployment is given – this phenomenon is called a “publication bias”. That is why findings of Boockman (2010) are quite interesting – in his meta analysis we can see that the economists can be divided almost evenly among these two groups, only 66.7% of the 55 examined studies support the negative impact of increase of minimum wages on unemployment.

There has also been a lot of criticism of the models created by both groups – mainly because of possible endogeneity in the data (Maloney, 1995; Neumark & Wascher, 1992) or unobserved individual or state characteristics (Dolado et al., 1996; Neumark & Wascher, 1995).

But there is one thing that almost all authors have in common: working with data on a state level. It is important to realize that, based for example on a work of Janský & Kolcunová (2015), the regional differences in price levels may change the size of different macroeconomic variables such as disposable income or GDP per capita. Hence I think it will be interesting to see to what extent the impact of minimum wages on these re-estimated socio-economic indicators differs from the effects we are familiar with now.

For the data I will use different European databases, mainly EUROSTAT and OECD ones. I will also use the re-estimated data from Janský and Kolcunová (2015) and hopefully other relevant sources as well. I am going to follow similar framework as Meer  West (2015), using panel data from the NUTS 2 region of the EU and estimate the relationships between the above mentioned variables.

Expected Contribution: This thesis will contribute to the current literature mainly by showing whether the computationally and data demanding adjustment of regional macroeconomic data bring additional insight in our understanding of the mutual relation between labor market dynamics and minimum wages or the nowadays used indicators are sufficient for creating macroeconomic policies.