Working Papers

Wage and Employment Impact of Minimum Wage: Evidence from Lithuania

with Jose Garcia-Louzao (Bank of Lithuania)

(February 2022)

Abstract: This paper evaluates the worker-level effects of a historically large and permanent increase in the minimum wage in Lithuania. Our identification strategy leverages variation in workers' exposure to the new minimum wage, and exploits the fact that there has been no increase in the minimum wage in previous years, to account for heterogeneous labor market prospects of low-wage workers relative to high-wage workers. Using detailed administrative records to track workers before and after the policy change, we show that the minimum wage hike significantly increased the earnings of low-wage workers. This direct effect was amplified by wage spillovers reaching the median of the income distribution. Overall, we find no negative effects on the employment prospects of low-wage workers. However, we provide suggestive evidence that young workers, highly exposed municipalities, and tradable sectors may be more negatively affected. Taken together, our findings imply an employment elasticity with respect to the minimum wage of -0.021, and an own-wage elasticity of -0.033, suggesting that wage gains dominated employment losses.

Bank of Lithuania Working Paper No 103


The Life-cycle Profile of Worker Flows in Europe

with Etienne Lalé (UQAM, CIRANO and IZA)

(January 2020)

Abstract: This paper provides a comprehensive account of the relationship between cross-country differences in aggregate employment and disaggregated differences in worker flows along the life cycle. We use survey micro-data for 31 European countries, and estimate the life-cycle profiles of transition probabilities across employment, unemployment and nonparticipation for each country. We develop a decomposition measuring the contribution of these transition probabilities to aggregate employment differences. We show, first, that separations from employment play a larger role than entries into employment; and, second, that life-cycle variation in worker flows is more important that cross-country variation in explaining this pattern. To go beyond description, we develop a life-cycle model with search frictions, an operative labor-force participation margin, and labor market institutions (unemployment insurance benefits and employment protection legislation). Certain preference and technology parameters depend on workers’ age, allowing the model to reproduce the life-cycle profiles of transition probabilities across employment, unemployment and nonparticipation observed in the data. We quantify how much of the life-cycle variation of flows is coming from preferences, technology, and most notably from labor market institutions, which are age-independent but whose effects on worker flows vary substantially over the life cycle.