8/2003 Marit Hinnosaar ja Tairi Rõõm. The impact of minimum wage on the labour market in Estonia: An empirical analysis

Working Papers of Eesti Pank. No 8, 2003

In Estonia, as in several other EU acceding countries, minimum wage has been on an upward trend and in the coming years it will expectedly be raised faster than the average wage. Despite its rapid increase, the impact of the minimum wage on Estonian labour market has not been analysed. The current paper aims to fill this gap. We estimate the effect of the minimum wage on employment and wages in Estonia during the period of 1995-2000, using micro-data from Estonian Labour Force Surveys. The estimation results indicate that a minimum wage increase leads to employment reduction for the group of workers who are directly affected by this change, ie those whose wages have to be raised as a result. Additional negative effect of raising the minimum wage is that the rate of compliance with this regulation diminishes as a result, thereby enlarging the share of workers whose salaries remain below the legally set minimum.

Author's e-mail addresses: Marit.Hinnosaar [at] epbe.ee, troom [at] epbe.ee

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank.

TABLE OF CONTENTS

1. Introduction
2. The Role of Minimum Wages in the European Union and Estonia
2.1. Minimum Wage Levels in the European Union
2.2. Debate over Minimum Wages in the European Union
2.3. The Role of the Minimum Wage in Estonia
3. Impact of the Minimum Wage on the Labour Market: Theoretical Aspects
3.1. Base Model - Perfectly Competitive Labour Market
3.2. Two-Sector Model
3.3. Heterogeneous Labour Force Model Monopsony Model
3.4. Monopsonistic Competition
4. Overview of Empirical Research on Minimum Wage
4.1. Research Methods
4.2. Research in the US
4.3. Research in Other OECD Countries
4.4. Research in Transition Economies
5. Impact of Minimum Wage on Employment in Estonia: Analysis Based on Micro-Level Data
5.1. Heckman Model and Specification Tests
5.2. Estimation Technique
5.3. Data
5.4. Estimation Results
Conclusion
References
Appendix 1. Summary results of the US minimum wage studies
Appendix 2. Summary results of minimum wage studies in other countries
Appendix 3. Minimum wage development in Estonia
Appendix 4. Subset proportions for the whole sample and the wage groups
Appendix 5. Model variables
Appendix 6. Employment effect of the minimum wage
Appendix 7. Minimum wage and the propensity of earning a below-minimum wage

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