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Effects of minimum wages on total employment where the legislative coverage is limited: Evidence from Cyprus time series data

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  • Pandelis Mitsis
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    Abstract

    Empirical labour market studies on the effects of minimum wages are typically confined to the sector or the worker group directly affected. Also, they often address the cases where the legislative coverage of the minimum wage is universal or almost universal. This study examines the relationship of the total employment with the minimum wage in the special case where only a number of occupations are covered by the relative legislation. A theoretical background is provided by a recently developed search and matching model and empirical evidence is provided by analysing time series data from Cyprus, one of the few countries in the world, and the only country in the European Union, where the minimum wage coverage is limited to only a small number of occupations. The analysis is done by carefully addressing the issues of stationarity, dynamic specification and endogeneity that most of the existing literature ignores. In order to ensure the estimated results are valid, the stability of the series is examined, using unit root tests under exogenous and endogenous structural breaks. Evidence is found of a significant and negative relationship between the minimum wage and total employment, despite the limited coverage of the minimum wage legislation. This suggests the existence of significant spillover effects to the occupations that are not covered by the minimum wage legislation.

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    File URL: http://papers.econ.ucy.ac.cy/RePEc/papers/05-12.pdf
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    Bibliographic Info

    Paper provided by University of Cyprus Department of Economics in its series University of Cyprus Working Papers in Economics with number 05-2012.

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    Length: 59 pages
    Date of creation: Mar 2012
    Date of revision:
    Handle: RePEc:ucy:cypeua:05-2012

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    Web page: http://www.econ.ucy.ac.cy

    Related research

    Keywords: minimum wages; matching models; time series models.;

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    1. Alison J. Wellington, 1991. "Effects of the Minimum Wage on the Employment Status of Youths: An Update," Journal of Human Resources, University of Wisconsin Press, vol. 26(1), pages 27-46.
    2. Edward M. Gramlich, 1976. "Impact of Minimum Wages on Other Wages, Employment, and Family Incomes," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 409-462.
    3. Bazen, Stephen & Marimoutou, Velayoudom, 2002. " Looking for a Needle in a Haystack? A Re-examination of the Time Series Relationship between Teenage Employment and Minimum Wages in the United States," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 64(0), pages 699-725, Supplemen.
    4. Bent Nielsen, 2000. "Cointegration Analysis in the Presence of Structural Breaks in the Deterministic Trend," Econometric Society World Congress 2000 Contributed Papers 1494, Econometric Society.
    5. Charles Brown & Curtis Gilroy & Andrew Kohen, 1983. "Time-Series Evidence of the Effect of the Minimum Wage on Youth Employment and Unemployment," NBER Working Papers 0790, National Bureau of Economic Research, Inc.
    6. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
    7. Vogelsang, T.J. & Perron, P., 1994. "Additional Tests for a Unit Root Allowing for a Break in the Trend Function at an Unknown Time," Cahiers de recherche 9422, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    8. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    9. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, 07.
    10. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    11. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
    12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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