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: karsten.staehr@ttu.ee

Homepage: http://www.ttu.ee/karsten-staehr

All viewpoints are personal!