Wage-employment relation:
debates and evidence
Lotta Takala-Greenish and Maphefo Sipula
Wednesday 4th November 2015
Overview of presentation
• Controversial questions regarding minimum wagesemployment
• Theoretical debates: neoclassical approach challenged
– Why does this debate matter?
– Differences between and within countries, sector dynamics
– Adjustment mechanisms
• Empirical evidence explained
– Different types of approaches
– Developed country evidence
– Developing country evidence Latam and Asia
• A focus on South Africa
– Issues around sectoral determinations and low threshold levels
Key questions under discussion
• Why the controversy around the wageemployment debate?
• How to approach understanding minimum
wages in developing countries?
• Sectors versus national minimum wages?
• Low or high thresholds?
http://amptoons.com/blog/2014/04/03/two-reasons-the-american-action-forumsnew-minimum-wage-study-shouldnt-convince-anyone/
The starting point: competitive markets
Source: “Effects of increasing the Real Minimum Wage” Figure 10.10, Chapter 10, Cooper R. &
A.A. John (2015), “Microeconomics: Theory Through Applications, v. 1.0”
Challenging competitive markets
• Market imperfection,
segmentation or monopsony
• Adjustment is complex
– direct vs indirect influence e.g. formal
to informal or gender differences
– Compensation (non-wage) or cost
changes (other inputs)
– Immediate to long-run responses
(e.g. cost or product price to
efficiency or process improvements)
– Broad and cumulative linkages: inputoutput, consumption, investor
confidence, fiscal linkages are
important
• National effects are more than
the sum of individual sector
effects
• Debates about shape/nature of
supply. Demand matters.
Many forms and levels of adjustment
Firm-level
Economy-wide
•
•
•
•
• Different adjustment across
gender, skills vs unskilled,
education levels, age (youth),
informal/formal, across regions
• Wage-income-consumption
• Wage-income-taxation
• Differences between types of
firms (state-owned and private)
• Adjustment within sectors e.g.
input-output linked firms, across
sectors (absorption of skills,
workers, other costs, but also spill
overs from increased efficiency
•
•
•
•
•
•
•
reduction in hours worked
reductions in non-wage benefits
reductions in training
changes in employment
composition
higher prices
improvements in efficiency
efficiency wage response from
workers
wage compression
reduction in profits
increases in demand (min wage as
stimulus)
reduced turnover
Economics is driven by theory. Discussions of theory
dominate academic journals, shape economic
inquiry and determine policy position. Although the
importance of theory is philosophically justifiable,
economic science cannot progress without
independent empirical testing” Stanley (2001:147)
Developed Country Evidence
The old versus the new MW research and
mixed empirical results
Funnel Graph
- Brown (1982); Card and Kruger (1993;1995)
and Neumark and Washer (1995; 2007 and
2008)
Source of variation across studies which make
comparison difficult
- Methodology
- Data source
- Time frame
- Difference in variables
- Sectors covered
- Controls
The rise of meta-analysis in MW research and
the problem of selection bias
Doucouliagos and Stanley (2008: 31)
Minimum Wage and Employment what
Meta-Analysis Show
Study
Countries Covered
Employment Impact
Doucouliagos and Stanley (2008)
Developed Country: United States
A 10% increase in the minimum wage reduce employment by
0.10%, the authors indicate that this is small and statistically
insignificant and thus would only result in a 1% decrease in
teenage employment
Boockmann (2010)
Industrial Countries
Negative employment effect that are heterogeneous between
countries labour market institutions.
Leonard et al. (2014)
Developed Countries: United Kingdom
A 10% increase in MW elasticity 0.1 which is not significant, with
the exception of home care industry which has significant
negative employment elasticity of 0.15.
Nataraj et al. (2014)
Low-income Countries
A 10% increase in MW resulted in employment elasticity of -0.08
in the formal sector, and there is a positive relationship between
minimum wage and informal sector employment
Belman and Wolfson (2014)
Developed Countries
Small negative employment elasticity between 0.0%-2.6% when
no distinction between U.S and other developed countries. When
focusing on U.S Studies they employment elasticity ranging
between -0.03 and -0.6%. Results are not statistically significant.
Chletsos and Giotis (2015)
Developed and Developing Countries
No impact of the minimum wage on employment.
Broecke, Fort and Vandeweyer (2015)
Emerging Countries
A 10 % increase in minimum wage resulting in an overall 0.03%
decline in employment. However they do find that low skilled,
youth, and low-wage earners are likely to be negatively affected
but the effects are quantitatively very small.
Developing Country Evidence
•
Evidence in developing countries is limited but
Growth of Empirical Evidence in regions such as
LATAM; Asia and Sub-Saharan Africa.
•
Why developed country evidence may not necessarily
apply in developing countries:
Diverse nature of employment in developing countries
and high levels of unemployment
High levels of inequality which may result in a
disaggregated effect amongst various groups
 Households (Household head vs non-household
head)
 Age
 Gender
 Skills level
 Regional Differences
Large informal sector and variation across sectors
Limited enforcement capacities
Variation in implementation of minimum wage
-
-
LATAM: Brazil Empirical Evidence on
Minimum Wage and Employment
•
Aggregate Employment Effect : A limited significant impact on employment was
also found in Brazil ranging from 0.05 % (Lemos, 2002;2004) with a 10%
increase in minimum wage to 3.1% dis- employment effect if minimum wage
was doubled (Broecke et al., 2015).
•
Effect on Hours Worked : Results on hour worked is mixed. Lemos(2004) finds
that minimum wage increase does affect number of hours worked by 0.16 %
and thus is key mechanism of adjustment . Neumark et al (2004); Broeke et al.
(2015) no statistically significant evidence of effects on hours worked.
•
Formal and Informal Employment Effect : Minimum wage does result in an
increase in informal sector employment.
•
Women and Youth Employment: Disemployment impact is greater for women
in the formal sector more and amongst Brazilian Youth.
Asia: Indonesia Empirical Evidence on
Minimum Wage and Employment
•
Aggregate Employment Effect: Insignificant negative impacts on overall levels of
employment Rama (2001)
•
Formal/Informal/Self-Employment Employment Effect: Negatively affect on
employment in formal sector of 1.6 percent among those earning below 90 percent of
the minimum wage and 2.5 percent for workers between 150 and 250 percent (Chun
and Khor 2010). However, Chun and Khor (2010) found significant increase in hours
worked for self-employed earning near the minimum wage.
•
Employment Effect by Skills: Contrary to a conventional argument that the minimum
wage results in loss of jobs for low-skilled workers, there is no evidence of such impact
in Indonesia (Rama 2001). In contrast, white collar workers may see an increase in
employment (Suryahadi et al 2003, p.29).
Asia: Indonesia Empirical Evidence on
Minimum Wage and Employment
•
Sector Employment Effect : The minimum wage increases between 1990 and 1996
did not have any negative employment effect in low-wage sectors, such as
clothing, textiles, leather and footwear (Rama,2001). Alatas and Cameron (2008)
found no evidence that large foreign or domestic garment companies relocated
outside Indonesia due to higher minimum wage. On the contrary, some estimates
showed positive employment effects in large companies.
•
Firm Size Employment Effect: Employment impacts varied among firms,
depending mostly on their size, where larger firms saw an increase in
employment. Rama (2001) argues that the doubling the minimum wage in the
1990s brought about a drop of 5 percent in urban areas
•
Women and Youth : Dis-employment amongst young urban wage employment is
not stronger (Rama,2001). Suryahadi et al (2003) exploring the urban formal
employment effects also finds negative employment adjustment amongst female,
young and less educated workers .The employment elasticity, -0.307 for female, 0.196 for young workers, -0.086 full time and -0.364 for part time workers
Example of SA domestic and agriculture workers
Proportion of workers
earning below R3000 or
the poverty line
estimated at R4,125.
In agriculture over 82%
and in domestic services
87% workers working
minimum 35
hours/week earn less
than R3000
High proportions
earning below the
poverty line in
agriculture (89.6%),
domestic services
(95.16%) and trade
(60.23%). Finn (2015,
p.69, 72)
What insights for/from South Africa
– Given there is (sectoral variation) – what criteria are important?
• Where there is a large impact on the most marginalised
• Differences in the economic role/position of sectors
• Dynamics i.e. shifts out of this sector or employment and more broadly with
the different linkages within an economy
– Why not just focus on sector minimum wages?
• They have not worked! (Structural change and long-term growth).
• Creates differences for firms and wide variation for employees.
• A national approach would level the playing field and shift focus away from
individual adverse effects at the level of the firm to broader economic
adjustment (intra- and inter-sector, but other linkages as well)
• Not about avoiding costs but creating growth in production, in demand, in
employment (volume, innovation, value added)
The level of minimum wage depends
– Adjustment
– Linkages:
consumption, inputoutput, sector
interaction
– Role of other policies
• Mitigate
• Stimulate
• Labour policies
and regulation
• Macro policies (to
create
employment)
Concluding remarks
•
•
•
•
•
•
•
Disaggregation is important to understand where the differences in impact and
adjustment arise from
However, these then need to be integrated to consider the specific and overall effects
of a wage change.
The evidence on different adjustment mechanisms suggests the need for supporting
labour policies targeting particular groups (e.g. youth, female, informal, or particular
sectors).
This also points to the need to view labour policies in conjunction with industrial and
other macro policies that shift focus away from supply and cost decisions to demand
and ways to boost productivity or efficiency improvements in the longer term.
Costs, skills, firm competitiveness are important but not overriding ways to look at
setting a minimum wage – target where restructuring is most needed and has
significant effect and incorporate importance of labour perspective in production.
The ability to support demand, trigger production efficiency improvements, and
redistribute form part of a constructive approach shifting away from the stagnant and
myopic approach dominated by tradeoffs of short term costs led by the fear of
restructuring.
Growth to be triggered by aggregate demand boost through macro (consumption,
taxes) and micro (efficiency,productivity).
THANK YOU FOR YOUR ATTENTION
Example from domestict & agri wage workers
<R150
R150R299
R300R499
R500- At least
R799
R800
Searching
Nonunempl. searching
Inactive Total % of t-1
All workers:
<R150
15.70
13.74
8.32
5.04
5.32
12.38
11.26
28.25 100
4.67
R150-R299
6.55
26.27
13.85
6.53
7.44
12.01
9.96
17.40 100
9.33
t-1 R300-R499
3.46
10.39
30.53
15.12
12.01
10.30
6.56
11.62 100 11.25
R500-R799
1.75
4.51
11.72
35.42
22.67
10.20
5.68
8.06 100 12.28
At least R800
0.34
1.03
2.02
4.20
81.26
4.72
1.99
4.43 100 62.47
Domestic and agricultural wage workers:
<R150
25.33
14.12
5.16
3.33
1.41
12.89
10.68
27.08 100
9.43
R150-R299
4.98
39.18
16.09
4.63
1.96
10.75
9.54
12.88 100 23.70
t-1 R300-R499
2.21
11.25
43.96
18.48
3.61
7.78
4.56
8.16 100 29.52
R500-R799
0.64
3.26
14.91
54.51
10.59
5.46
4.95
5.68 100 26.32
At least R800
0.90
3.16
7.94
22.11
49.13
5.02
4.51
7.22 100 11.02
Source: LFS panel, September 2001 to March 2004
Notes: (i) All workers N = 29273; Domestic and agricultural wage workers N = 4080; (ii) Earnings measured in real 2000
prices; (ii) Transitions for individuals employed in either domestic or agricultural work in period t-1and either domestic or
agricultural work or non-employment in period t, in at least two consecutive waves
• Domestic and farm workers:
– earn substantially less, and have higher levels of low-wage persistence
– are less likely to transition to high-wage work
– are somewhat less likely to exit employment
than workers in general.
Neglected areas / further research
• Regional (cross-national) minimum wages, production and
trade
• Connections between informal and formal across different
economic activities
• Phasing: multiple small increments or big bang
• Enforcement and monitoring (high penalties but not
implemented)
• Complementarity of policies: labour and macroeconomic
policies
–
–
–
–
Focus on specific labour categories (e.g. age, gender, informal)
Investment (private and public) and capital flight
Exchange rates
Interest rates