Labor Market Effects of a Minimum Wage: Evidence from Ecuadorian Monthly Data

Year: 
2021
Topic: 
Labor

The policy debate over increasing a federal minimum wage from $7.25-per-hour to $15-per-hour has been a hot topic in the U.S. Despite a vast number of studies of the labor market impacts of a minimum wage (see Neumark and Wascher, 2008; Card and Krueger, 2015), there have been few studies on the impact of a minimum wage, especially the federal minimum wage, on overall employment, worker flows, and wage distribution. This is partly because there are limited datasets available to researchers interested in studying minimum wage policy at the national level. Hence, evaluating a minimum wage policy, just like the current policy debate in the U.S., at the national level remains a challenging question. Choi, Rivadeneyra, and Ramirez (2021) use an Ecuadorean matched employer-employee dataset to investigate the impacts of the nationwide minimum wage, Unified Minimum Wage, on overall employment, worker flows, and wage distribution in Ecuador. Our findings can shed some light on the current policy debate over raising the federal minimum wage in the U.S.

Historical Background

We exploit a change in the Unified Minimum Wage at the national level in Ecuador from $170 to $200 in 2008, the first minimum wage rise under President Rafael Correa. Although the Unified Minimum Wage increases at the beginning of every year in Ecuador, the minimum wage increase in 2008 was particularly noteworthy for its size (around 10 percent real increase). Since this was the first and largest minimum wage increase after Rafael Correa’s inauguration, we consider this increase as an exogenous shock to Ecuador’s economy. In the later years of Rafael Correa’s administration, Ecuadorian firms could have expected additional minimum wage increases given Correa’s 21st-century socialist policies, but there were no sizable increases in the minimum wage after 2008. This is therefore an ideal setting for studying unexpected Unified Minimum Wage increase on overall employment, worker flows, and overall wage distribution.

Methodology

Our units of analysis are the worker and the firm and covers the entirety of formal sector workers at a monthly frequency. This allows us to investigate short-run dynamic labor market impacts of the minimum wage. Specifically, we use a difference-in-differences approach, at the firm level and at the worker level, to estimate the labor market impacts of the minimum wage increase. Our approach relies on the idea that the effect of the minimum wage policy can have differential impacts across firms or workers. The increase in the minimum wage will reduce labor demand for firms that have higher shares of workers who are paid less than the new minimum wage. At the worker level, the probability of remaining employed or wages in response to the minimum wage policy can have a differential impact on workers.

Firm-Level Employment

Figure 1 presents the firm-level (employers' decision) employment estimation results. The minimum wage reduces affected (treated) firms’ employment by 0.5% relative to unaffected (control) firms that are not bounded by the new minimum wage in the first month after the policy. The effect increases to 2.5% percent by the fourth month after the policy. The amplifying result further suggests that firms gradually adjust their workforces in response to the minimum wage change.

Meer and West (2016) argue that the minimum wage would impact employment over time through changes in growth rather than cause an immediate drop in relative employment levels. Using an event study, we estimate that the minimum wage slowed the growth rate of employment in the treated firms, but did not reduce their absolute number of employees (see Figure 2).

Job Separations and New Hires

We further investigate whether continuing firms may have changed the composition of their labor force by dismissing existing workers or reducing new hires following the increase in the minimum wage. Previous studies have found a negative effect of a binding minimum wage on both separations and hires (see Portugal and Cardoso, 2006; Brochu and Green, 2013; Dube, Lester and Reich, 2016). We find that the minimum wage leads to 1.2 percentage point increase in the separation rate but 1.7 percentage point decrease in the hiring rate after four months. Our estimation results indicate that Ecuadorian firms adjusted their labor force composition by both laying off existing workers and slowing new hires after the minimum wage hike. While our results on hiring rates are in line with the previous studies, the estimation results on separation are at odds with the previous findings.

Worker-Level Employment

At the worker-level, we find that the minimum wage hike led to a 2.2 percentage point decline in the probability of remaining employed after one month, and the treatment effect rose to 3.9 percentage point after four months. The result reconfirms the firm-level finding. We further analyze the heterogeneous employment effects. Young workers below age 25 have a 0.9 to 1.8 percentage point lower probability of remaining employed than the prime working age group. While previous studies found contradictory employment impacts for younger and less-skilled workers (e.g., Card, 1992; Neumark and Wascher, 1992; Neumark et al., 2014; Allegretto et al., 2017), we detect a short-run negative employment effect for young workers.

Worker-Level Wage

We further investigate the impacts of the minimum wage on worker-level wages. Our core findings are as follows. First, we find that wage growth for the control group (workers who receive equal to or more than $500) was 3.9 percent. Second, workers who receive less than the 2008 monthly minimum wage, $200, experience higher monthly wage growth than workers who receive equal to or more than the 2008 minimum wage. This finding implies that the minimum wage helps reduce wage inequality by raising wages for low-paid workers relatively more than for high-paid workers. Third, we identify the wage spillover effect resulting from the minimum wage increase. We observe that wage spillovers are effectively up to the 77th percentile of the wage distribution. Figure 3 displays the percentage change in the monthly wage growth of workers in each bin from 2007m12 to 2008m1. About 42% of the workforce experience wage spillovers that range from 2.6% to 13.6%. Generally, the spillover effects decay as wage rises.


References:

Allegretto, Sylvia, Arindrajit Dube, Michael Reich, and Ben Zipperer, “Credible research designs for minimum wage studies: A response to Neumark, Salas, and Wascher,” ILR Review, 2017, 70 (3), 559–592.

Brochu, Pierre and David A Green, “The impact of minimum wages on labour market transitions,” The Economic Journal, 2013, 123 (573), 1203–1235.

Card, David, “Using regional variation in wages to measure the effects of the federal minimum wage,” ILR Review, 1992, 46 (1), 22–37.

Card, David and Alan B Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,” The American Economic Review, 1994, pp. 772–793.

Choi, Jaerim, Ivan Rivadeneyra, and Kenia Ramirez, “Labor Market Effects of a Minimum Wage: Evidence from Ecuadorian Monthly Administrative Data,” Available at SSRN 3775940, 2021.

Dube, Arindrajit, T William Lester, and Michael Reich, “Minimum wage shocks, employment flows, and labor market frictions,” Journal of Labor Economics, 2016, 34 (3), 663–704.

Meer, Jonathan and Jeremy West, “Effects of the minimum wage on employment dynamics,” Journal of Human Resources, 2016, 51 (2), 500–522.

Neumark, David and William L Wascher, Minimum wages, MIT Press, 2008.

Neumark, David and William Wascher, “Employment effects of minimum and subminimum wages: panel data on state minimum wage laws,” ILR Review, 1992, 46 (1), 55–81.

Neumark, David, JM Ian Salas, and William Wascher, “Revisiting the minimum wage—employment debate: throwing out the baby with the bathwater?,” ILR Review, 2014, 67 (3_suppl), 608–648.

Portugal, Pedro and Ana Rute Cardoso, “Disentangling the minimum wage puzzle: an analysis of worker accessions and separations,” Journal of the European Economic Association, 2006, 4 (5), 988–1013.

Share this