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16minw-show3.doc 1
Open seminar, Eesti Pank
20 September 2016
Minimum Wages and the Wage Distribution
in Estonia
KARSTEN S...
16minw-show3.doc 2
Menu
1. Introduction
2. Results from literature
3. Methodology
4. Data and summary statistics
5. Estima...
16minw-show3.doc 3
1. Introduction
“The new normal” distributional concerns
Piketty (2014)
ECB and monetary policy (Mersch...
16minw-show3.doc 4
Questions
a) How do minimum wages affect employment?
b) How do changes in minimum wages affect wage dis...
16minw-show3.doc 5
Contribution
Estonia post-communist (until now only detailed studies for Ukraine, Russia)
EU country fr...
16minw-show3.doc 6
2. Results from literature
Methodological complication
In given period “everybody” typically face same ...
16minw-show3.doc 7
Results
USA
Spill-over effects of minimum wage up to 25th
percentile
Gradual decline of the real value ...
16minw-show3.doc 8
3. Methodology
Identification problem lack of variation in minimum wage across wage earners
Cross-secti...
16minw-show3.doc 9
Wage distribution differs across cells
Effect of minimum wage on wage distribution depends on size of t...
16minw-show3.doc 10
Estimations
Find effect of the “effective minimum wage” on various percentiles of the wage
distributio...
16minw-show3.doc 11
Controls year dummies, regional dummies, GDP growth and unemployment rate
Hopefully remove effects of ...
16minw-show3.doc 12
4. Data and summary statistics
Statutory minimum wage
In principle set in tri-partite negotiations in ...
16minw-show3.doc 13
Estonian Labour Force Survey (LFS)
2001-2014
No panel
Only full-time wage earners (e.g. self-employed ...
16minw-show3.doc 14
NB1: All wages net of tax
NB2: LFS wage data ≠ Eesti Statistika wage data
16minw-show3.doc 15
5. Estimation results
For whole sample
For various subgroups
Males vs. females
Age 45 or less vs. age ...
16minw-show3.doc 16
16minw-show3.doc 17
Marginal
effects
evaluated at
means of
explanatory
variables
16minw-show3.doc 18
Marginal effect = percentage change in wage (at given percentile of wage
distribution) when minimum wa...
16minw-show3.doc 19
NB: Percentage change at different log wage levels!
Next slide marginal effects in euros!
16minw-show3.doc 20
Wages = net-of-tax wages
16minw-show3.doc 21
Calculate effect on average wage
Marginal effects at different percentiles
Average wage at different p...
16minw-show3.doc 22
NB: Wage distributions very different for men and women, for young and grown-ups
16minw-show3.doc 23
Effect of minimum wage seems to be smaller during crisis than before and after
16minw-show3.doc 24
6. Final comments
Standard exercise using standard methodology!
But augmented with sectoral dimension ...
16minw-show3.doc 25
Why large spill-over effects in Estonia?
Minimum wage main collective wage setting mechanism
Great awa...
16minw-show3.doc 26
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Karsten Staehr. Minimum Wages and the Wage Distribution in Estonia

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Open seminar, Eesti Pank
20 September 2016
All opinions 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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Karsten Staehr. Minimum Wages and the Wage Distribution in Estonia

  1. 1. 16minw-show3.doc 1 Open seminar, Eesti Pank 20 September 2016 Minimum Wages and the Wage Distribution in Estonia KARSTEN STAEHR Tallinn University of Technology, Eesti Pank All opinions personal! Simona Ferraro, Jaanika Meriküll & Karsten Staehr (2016): “Minimum wages and the wage distribution in Estonia”, Working Papers of Eesti Pank, no. 6/2016
  2. 2. 16minw-show3.doc 2 Menu 1. Introduction 2. Results from literature 3. Methodology 4. Data and summary statistics 5. Estimation results 6. Final comments NB: Positive / descriptive analysis!
  3. 3. 16minw-show3.doc 3 1. Introduction “The new normal” distributional concerns Piketty (2014) ECB and monetary policy (Mersch, 2014) IMF and fiscal policy (Dabla-Norris et al., 2015) Changes to person income taxation in EE and LV 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
  4. 4. 16minw-show3.doc 4 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) in isolation! How do changes in the minimum wage affect wages at different percentiles of the wage distribution at or above the changed minimum wage? Use (modified version of) standard methodology Lee (1999)
  5. 5. 16minw-show3.doc 5 Contribution Estonia post-communist (until now only detailed studies for Ukraine, Russia) EU country from CEE Market-oriented, flat tax, low social transfers, little collective bargaining, rather wide wage and income distributions Consider pre-crisis, crisis, post-crisis periods separately ☺☺☺☺
  6. 6. 16minw-show3.doc 6 2. Results from literature Methodological complication In given period “everybody” typically face same minimum wage (“same treatment”) Changes from period to period ⇒⇒⇒⇒ 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
  7. 7. 16minw-show3.doc 7 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) Post-communist / emerging markets Mexico (Bosch & Manacorda 2010), Vietnam (Hansen et al. forthcoming) 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)
  8. 8. 16minw-show3.doc 8 3. Methodology Identification problem lack of variation in minimum wage across wage earners Cross-sectional dimension Time dimension Lee (1999) Consider various “labour markets” / “cells” Lee’s labour market / cell state, year Our labour market / cell region, year, sector
  9. 9. 16minw-show3.doc 9 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 wage distribution in cell ⇒⇒⇒⇒ binding or effective for many large effect on wage distribution If minimum wage low relative to wage distribution in cell ⇒⇒⇒⇒ binding or effective for only few little effect on wage distribution Measure of “bindingness” or effectiveness of minimum wage in cell = Minimum wage – median wage in cell (< 0) = “Effective minimum wage” in cell Median wage in cell measure of wage distribution in cell Identifying assumption the median wage (and above) in cells not affected by the minimum wage
  10. 10. 16minw-show3.doc 10 Estimations Find effect of the “effective minimum wage” on various percentiles of the wage distribution Our empirical model ijtijttijttijt p ijt wwwwww ε++−β+−β=− controls)()( 250 2 50 1 50 i = region, j = sector, t = year p ijtw = p-percentile of log wage in region i, sector j and year t 50 ijtw = median log wage tw = log minimum wage in year t NB: Run regression for any percentile p #observations = #regions × # sectors × #years [Intuition increase of wt]
  11. 11. 16minw-show3.doc 11 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
  12. 12. 16minw-show3.doc 12 4. Data and summary statistics Statutory minimum wage In principle set in tri-partite negotiations in practice government has final say 0 100 200 300 400 02 04 06 08 10 12 14 0 100 200 300 400 Figure 0: Pre-tax minimum wage for full-time wage-earner, EUR per month
  13. 13. 16minw-show3.doc 13 Estonian Labour Force Survey (LFS) 2001-2014 No 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
  14. 14. 16minw-show3.doc 14 NB1: All wages net of tax NB2: LFS wage data ≠ Eesti Statistika wage data
  15. 15. 16minw-show3.doc 15 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 …
  16. 16. 16minw-show3.doc 16
  17. 17. 16minw-show3.doc 17 Marginal effects evaluated at means of explanatory variables
  18. 18. 16minw-show3.doc 18 Marginal effect = percentage change in wage (at given percentile of wage distribution) when minimum wage increases by 1 percent
  19. 19. 16minw-show3.doc 19 NB: Percentage change at different log wage levels! Next slide marginal effects in euros!
  20. 20. 16minw-show3.doc 20 Wages = net-of-tax wages
  21. 21. 16minw-show3.doc 21 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
  22. 22. 16minw-show3.doc 22 NB: Wage distributions very different for men and women, for young and grown-ups
  23. 23. 16minw-show3.doc 23 Effect of minimum wage seems to be smaller during crisis than before and after
  24. 24. 16minw-show3.doc 24 6. Final comments Standard 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 Substantial spill-over effects even beyond 20th percentile Minimum wage ↑ € 1 ⇒⇒⇒⇒ average wage ↑ € 0.11 ☺☺☺☺ /
  25. 25. 16minw-show3.doc 25 Why 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 Overall conclusion minimum wage seems to lift wages in lower tail of wage distribution ⇒⇒⇒⇒ potential to affect wage distribution
  26. 26. 16minw-show3.doc 26 Extra slide

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