minimum wages and the wage distribution in estonia · minimum wages and the wage distribution in...
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18th World Congress of the International Economic Association
Mexico City, Mexico, 19-22 June 2017
Minimum Wages and the Wage Distribution
in Estonia �
KARSTEN STAEHR
Tallinn University of Technology
Eesti Pank
All viewpoints are personal!
Simona Ferraro, Jaanika Meriküll & Karsten Staehr (2016): “Minimum wages and the wage
distribution in Estonia”, Working Papers of Eesti Pank, no. 6/2016
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Menu
1. Introduction
2. Results from literature
3. Methodology
4. Data and summary statistics
5. Estimation results
6. Final comments
Last slide
NB: Positive / descriptive analysis!
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1. Introduction
“The new normal” � distributional concerns
Minimum wages
� Politically contested topic in USA, UK
� … and recently Germany
� IMF (2016): “Cross-country report on minimum wages”, IMF Country Report, no.
16/151 (http://www.imf.org/external/pubs/ft/scr/2016/cr16151.pdf)
� Latvia, Lithuania, Poland and Romania
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Questions
a) How do minimum wages affect employment?
b) How do changes in minimum wages affect wage distribution?
b1) How do minimum wages affect wages for wage-earners directly affected by
changes?
b2) How do minimum wages affect wages for wage-earners not directly affected,
i.e. above changed minimum wage?
~ Spill-over or ripple effect
�
Effect on average wage depends on spill-over effects ⇒⇒⇒⇒ macroeconomic
implications
This paper
� Address b2)!
� How do changes in the minimum wage affect wages at different percentiles of the
wage distribution?
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Standard methodology � Lee (1999)
� Lee (1999) “data hungry” � only studies from large countries with many regions
Contributions
� Modify Lee (1999) � possible to modify methodology to use when small sample?
� Estonia � post-communist (until now only detailed studies for Ukraine, Russia)
� EU member from 2004
� Market-oriented, flat tax, low social transfers, little collective bargaining, rather
wide wage and income distributions
� Only 1.3 million
� Consider pre-crisis, crisis, post-crisis periods separately ☺☺☺☺
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2. Results from literature
Methodological complication
� In given period � ‘everybody’ typically face same minimum wage (‘same
treatment’)
� Changes from period to period ⇒⇒⇒⇒ very weak identification
Methods
� Early studies � plots of wage distributions before and after
� From mid-1990s � semi-parametric methods
� Lee (1999) � ‘smart’ identification strategy & econometrics
� Various other methods
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Results
USA
� Spill-over effects of minimum wage up to 25th
percentile
� Gradual decline of the real value of the federal minimum wage ⇒⇒⇒⇒ lower tail
inequality ↑ (DiNardo et al. 1996, Lee 1999, Autor et al. 2016)
UK
� Generally small or no spill-over effects (Stewart 2012, Dickens & Manning 2004b)
Continental Europe
� Few studies (no minimum wage in many countries)
Emerging markets / post-communist
� Mexico (Bosch & Manacorda 2010) � substantial spill-over effects
� Ukraine � large spill-over effects, largest for women (Ganguli & Terrell 2006,
JCE)
� Russia � large spill-over effects, largest for women (Lukiyanova 2011, NSE)
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3. Methodology
Identification problem � lack of variation in minimum wage across wage earners
� Cross-sectional dimension
� Time dimension
Lee (1999) � identification if same ‘treatment’ but different extent of sickness!
Consider various ‘labour markets’ / ‘cells’
� Lee’s cell � state, year
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Wage distribution differs across cells �
Effect of minimum wage on wage distribution depends on size of the minimum wage
relative to the wages in the particular cell:
� If minimum wage high relative to wages in cell ⇒⇒⇒⇒ binding or effective for many ⇒⇒⇒⇒
large effect on wage distribution
� If minimum wage low relative to wages in cell ⇒⇒⇒⇒ binding or effective for only few
⇒⇒⇒⇒ little effect on wage distribution �
‘Measure’ of wage distribution in cell � median wage in cell
Measure of ‘bindingness’ or effectiveness of minimum wage in cell
=
‘Effective minimum wage’ in cell
=
Minimum wage – median wage in cell (< 0)
Main identifying assumption � the median wage (and above) in cells not affected by
the minimum wage
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Our tiny contribution
Lee’s cell � state, year
Our cell � region, year, sector
� For robustness � region, year, occupation
NB:
� Assumption � only little movements across cells!
� Estonia vs. USA
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Estimations
Find effect of the ‘effective minimum wage’ on various percentiles of the wage
distribution
Our empirical model
ijtijttijttijtpijt wwwwww ε++−β+−β=− controls)()( 250
250
150
� i = region, j = sector, t = year
� pijtw = p-percentile of log wage in region i, sector j and year t
� 50ijtw = median log wage
� tw = log minimum wage in year t
NB: Run regression for any percentile p
� #observations = #regions × # sectors × #years
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Controls � year dummies, regional dummies, GDP growth and unemployment rate
� Hopefully remove effects of other factors
� Quadratic terms allow for non-linear relationship � compute marginal effect at
averages of explanatory variables
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4. Data and summary statistics
Statutory minimum wage
� In principle set in tri-partite negotiations
0
100
200
300
400
02 04 06 08 10 12 140
100
200
300
400
Figure 0: Pre-tax minimum wage for full-time wage-earner, EUR per month
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Estonian Labour Force Survey (LFS)
� 2001-2014
� Cross sections (not panel)
� Only full-time wage earners (e.g. self-employed excluded)
� 6000-7000 observations per year � in total 91,447 observations
� Wage net-of-tax
� Other information used
� 5 regions (including counties), 11 sectors for creating cells
� Gender, age for sample splits
� Each cell (region, sector, year) � at least 20 wage-earners
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NB1: All wages net of tax
NB2: LFS wage data ≠ wage data from Statistics Estonia
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5. Estimation results
� For whole sample
� For various subgroups
� Males vs. females
� Age 45 or less vs. age above 45
� Boom 2001-2007, crisis 2008-2010, recovery 2011-2014
Percentiles p = 5, 10, 15, 20, 25, 30, 40 (and for checking: 60, 70, 80, 90)
Empirical notation:
� minw – p50 = log minimum wage – median log wage = effective minimum wage
� p5 – p50 = log wage at 5th
percentile – median log wage
� p10 – p50 = log wage at 10th
percentile – median log wage
� …
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Marginal
effects
evaluated at
means of
explanatory
variables
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Marginal effect = percentage change in wage (at given percentile of wage
distribution) when minimum wage increases by 1 percent
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NB: Percentage change at different log wage levels!
� Next slide � marginal effects in euros!
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Wages = net-of-tax wages
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Calculate effect on average wage
� Marginal effects at different percentiles
� Average wage at different percentiles
� Number of persons in interval around each percentile �
Minimum wage ↑ € 1 ⇒⇒⇒⇒ average wage ↑ € 0.11
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NB: Wage distributions very different for men and women, for young and grown-ups
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Effect of minimum wage seems to be smaller during crisis than before and after
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6. Final comments
Exercise using standard methodology!
� … but augmented with sectoral dimension for identification
Results
� Fairly large spill-over effects, at least to 20th
percentile
� Stronger spill-over effects for women than for men and for older than young
(reflecting different wage distributions)
� Weaker spill-over effects during crisis than during boom and recovery
In euros
� Minimum wage ↑ € 1 ⇒⇒⇒⇒ average wage ↑ € 0.11 ☺☺☺☺ / ����
Why relatively large spill-over effects in Estonia?
� Minimum wage main collective wage setting mechanism
� Great awareness � negotiations, press, in time for wage adjustments in beginning
of year
� Indexation of fees and prices � kindergarten, child support, traffic fines
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Last slide
KARSTEN STAEHR
Tallinn University of Technology
Eesti Pank
E-mail: [email protected]
Homepage: http://www.ttu.ee/karsten-staehr
All viewpoints are personal!