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Rethinking the Minimum Wage: The U-Shaped Relationship with Unemployment and Who Bears the Burden

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  • João Dantas

    (Federal Fluminense University Universidade Federal Fluminense)

Abstract

This article carries out an empirical analysis of the controversial relation between the minimum wage and unemployment. To do this, it uses panel data for 26 countries for 2001–2022 and the fixed effects and S-GMM methods. The results are robust and indicate a non-linear relationship—specifically, a U-shaped pattern—between the minimum wage and unemployment. Initially, the minimum wage has a strong impact on reducing unemployment, but this effect diminishes with further raising. Above a certain level, the minimum wage has the opposite effect and increases unemployment. In addition, the results indicate that this turning point is low, meaning that overall, there is little room for countries to use the minimum wage without harming employment. The effect on economic activity seems to be an important transmission channel for the impact of the minimum wage on unemployment. Individuals with basic education and young people are the most impacted groups by an increase in the minimum wage, in terms of both positive and negative effects. They are followed by older people and women. On the other hand, adults and individuals with advanced education are the least impacted. Finally, investment and institutional quality, as well as sound macroeconomic aggregates, are important factors in reducing unemployment.

Suggested Citation

  • João Dantas, 2025. "Rethinking the Minimum Wage: The U-Shaped Relationship with Unemployment and Who Bears the Burden," De Economist, Springer, vol. 173(4), pages 637-664, December.
    • Handle: RePEc:kap:decono:v:173:y:2025:i:4:d:10.1007_s10645-025-09461-x
    DOI: 10.1007/s10645-025-09461-x
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    Keywords

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    JEL classification:

    • J08 - Labor and Demographic Economics - - General - - - Labor Economics Policies
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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