The document summarizes the results of a study analyzing how minimum wage changes in Estonia affect the wage distribution. It finds fairly large spill-over effects, with wages increasing beyond the 20th percentile when the minimum wage increases. The effects are stronger for women than men and older workers than younger. Spill-over effects are weaker during economic crises. A 1% increase in the minimum wage is estimated to increase average wages by about 0.11 euros. The large spill-over effects are attributed to Estonia's use of minimum wage as a main collective bargaining mechanism.

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. 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!

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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

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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)

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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 ☺☺☺☺

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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

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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)

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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

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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

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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]

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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

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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

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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

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NB1: All wages net of tax
NB2: LFS wage data ≠ Eesti Statistika wage data

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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
…

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Marginal
effects
evaluated at
means of
explanatory
variables

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Marginal effect = percentage change in wage (at given percentile of wage
distribution) when minimum wage increases by 1 percent

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NB: Percentage change at different log wage levels!
Next slide marginal effects in euros!

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Wages = net-of-tax wages

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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

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NB: Wage distributions very different for men and women, for young and grown-ups

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Effect of minimum wage seems to be smaller during crisis than before and after

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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 ☺☺☺☺ /

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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

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Extra slide