How will Countries like Sweden Benefit
or Suffer from a Minimum Wage?
Anton Law
Azeez Bukola Shittu
NAA 305 Bachelor thesis Supervisor: Clas Eriksson
Abstract
Recently the European Union proposed a “Fair minimum wage initiative”. The proposal is to create a common framework across the EU 28 member countries. However, the Nordic countries have rejected the proposal. We investigate this issue through a literature review. We start with a presentation of empirical research on the effects of a minimum wage. In the theoretical analysis we use the simple classical monopsony model and the model with frictions in our examination of minimum wage effect on welfare and labour market participation. The conclusion is mixed concerning effects from an introduction of minimum wage, depending on how the countries adopt and implement the minimum wage. If the countries government implemented minimum wage correctly using specific industry minimum wage, there is clear evidence for a positive effect.
Tables of Contents
1 Introduction ... 4
1.1 Minimum Wage in Sweden ... 4
1.2 Sweden Labour Union ... 5
1.3 The Problem ... 5
1.4 A Short Review of the Literature ... 5
1.5 Aim of the Thesis ... 7
1.6 Limitations ... 8
1.7 Methodology ... 8
1.8 Structure of the Thesis ... 8
2 Relevance of the Minimum Wage... 8
3 The Analysis ... 10
3.1 Theoretical Research ... 10
3.2 The Employment Decision in the Short Run and Long Run in Competitive Market... 10
3.3 The Monopsony Model ... 11
3.4 The Frictions in Minimum Wage Effect on Welfare and Labour Market Participation ... 12
3.5 Analysis of The Minimum Wage Effect on Welfare and Labour Market Participation ... 16
4 Minimum Wage Benefit and Harm ... 18
4.1 Empirical Research Evidence in Minimum Wage Effect in Various Countries ... 18
5 Implications for Sweden ... 23
6 Conclusion ... 24
1 Introduction
A recent hot topic in the News around the world, according to Daniel Boffey (2020), is the European Union Commission proposal of a “fair minimum wage initiative”. The proposal is to create a common framework on minimum wage. The background is that EU executives have warned that low wage workers conditions have worsened, and wage inequalities have increased across Europe. The European Union has 28 members; some countries are more prosperous than others. A lot of countries in the EU recognize the proposal as positive. However, high wage countries like Sweden, Denmark, and Finland have rejected the idea. The Nordic countries have fears that the EU’s universal minimum wage framework will undermine their Nordic countries model of cooperative negotiating.
1.1 Minimum Wage in Sweden
Sweden is one of the six countries in the EU who does not have statuary minimum wage (The Guardian, 2020). Sweden has labour unions which negotiate wages with employer organizations. This is instead of the classic model, in which countries governments decide a minimum wage. Why does Sweden not have a minimum wage? Fredrik Carlgren (Ekonomifakta, 2016) says that a minimum wage has a significant impact on how the labour market will function. Carlgren states that a country that has a minimum wage will experience effects on the number of job opportunities in different sectors. Especially if the minimum wage is set too high, there is a risk of jobs vanishing or never be created. Even though Sweden has no minimum wage IMF (International Monetary Fund), and Konjunkturinstitutet reported that Swedish nominal wages for foreign-born youth are one of the highest hourly wages in the labour market (Ekonomifakta,2016), which could explain the high unemployment rates in this group.
Per Skedinger, who is a researcher for Swedish IFN and a professor in Linnéuniversietet explains in an interview with Svenska Dagbladet (SvD) that the proposal for a minimum wage in Sweden is a proposal for the Swedish economy to decide. The main reason is that the EU commission does not have higher rights than its EU member countries. In addition, Sweden already has collective agreements and the minimum wage will harm the Swedish economy more than benefit it. He points out a considerable problem with the EU proposal. It will be hard for the EU commission to propose adequate minimum wage levels that will affect countries. Therefore, EU members all have different ways on what they think of the economic
development in the country and there are extensive gaps between the older members and the newer members in the EU. (Svenska Dagbladet, 2020)
1.2 Sweden Labour Union
Labour unions negotiate wages and terms of employment for 90% of all workers in Sweden and they have important influence on people that are outside the labour unions as well. Labour union laws can solve most of the litigation without legal processes. Labour union is a sort of peace treaty. Employers understand that all workers will work for them as long as they have signed agreement and there is no conflict between the parties. Furthermore, if there were no labour union workers and employer would not be in harmony. (LO, 2019).
1.3 The Problem
Sweden is highly known for being in top of most rankings in the world, which includes competitive market, quality of life, high income, taxes, equality and education. On the other hand, Sweden is one of the countries in the EU which has the highest unemployment rate (Eurostat). Several articles have shown positive correlation between unemployment and minimum wage. If there is a correlation should not statuary minimum wage contribute to an increase in the unemployment in countries like Sweden. This thesis will focus on the possible correlation between minimum wage and unemployment.
1.4 A Short Review of the Literature Reservation Wage
The textbook by George Borjas (2016) describes the definition of reservation wage. Reservation wage indicates that the individual will not work if the market wage is less than the reservation wage. Thus, the individual will join the labour market only if the market wage is above the reservation wage. The choice to work instead of being out of work is centred on the market wage, which specifies how much the worker requires to be persuaded into working that first hour. Furthermore, if holding the reservation wage constant, a high-wage individual would be more likely to work. As a result, raising the wage rate, will increase the labour force participation rate. Further, Borjas describes in the ‘theory of work’ that our demand for leisure time reacts to price. When the wage rate is high, people will find different ways of minimizing the use of their own valuable time.
Labour Market Equilibrium
The labour market represents the workers looking for jobs and the firms looking for workers. Both will meet at some intersection; this intersection is called equilibrium. At the equilibrium wage, the employment describes the hours that workers are willing to work for firms and it is equal to the numbers of hours firms are willing to employ. What occurs if workers are paid a wage higher than the equilibrium? At 𝑤ℎ𝑖𝑔ℎ the firms are less willing to employ. This suggests an excess of workers competing for the few available job openings according to Borjas (2016). This would create unemployment. However, he argues that this will set a downward pressure on the wage and eventually it goes down to the equilibrium level. On the opposite, workers are paid less than the equilibrium level, i.e. 𝑤𝑙𝑜𝑤. Employers will want to employ a lot of workers; however, few workers are willing to work for such a low wage at 𝑤𝑙𝑜𝑤. The competition will lead to an upwards pressure, because of few workers and the wage increase towards the equilibrium level.
The Economics of Minimum Wage
George Stigler conducted a study after the introduction of a US mandatory minimum wage in 1938. Stigler assumed that the market is a competitive labour market. Then a minimum wage will create unemployment rather than employment. Additionally, hired workforces lose their employment because higher wage decreases the current employment demand. Moreover, with the higher wage, more people are willing to work. The minimum wage is supposed to assist low-skilled workers in the labour market. Rather than assisting the low skilled labour force, however, the result is that low wage workers face a higher risk of getting laid off. Surely, some workers will be fortunate to have higher wages. Nevertheless, the minimum wage has little sympathy for low skilled workers. On a similar note, Nils Gottfries (2013) showed a similar result. He stated that in the short run in counties with floating exchange rate the fundamental mechanism is that an increase in the wage will cause higher inflation. With an increase in inflation, the central bank needs to counteract and increase the interest rate. Because of the high-interest rate, consumption, investment and aggregate demand decrease, and production will employ fewer workers. Moreover, Gottfries says that a high wage increase will affect the competitiveness and reduce the exports. Thus, an increase in minimum wage will have negative impact on employment.
Minimum Wage and the Effects
The economists from non-Nordic countries, have argued that labour markets have peculiar characteristics, all which are different from markets for other products. The above assertions have been supported by Mabbett (2016), espousing that a rise in the prices of the products have no normal effects on commodity quality. In contrast to this, he continues that a rise in wages may end up improving the quality of the work being undertaken through enhanced employees’ morale. Besides, improved pay will yield low levels of turnover while at the same time enhancing productivity.
According to Ilsøe (2016), increased productivity has what it takes when it comes to offsetting the margin by which the wages have grown up. In that case, organizations will have no reason to lower their staff population, despite the increased minimum wage. The same applies in the case of hours, where the businesses will have no reason to cut down their working hours, it depends on how high the minimum wage is, compared to the actual wage. Besides, provided that organizations are in a position to meet the higher cost by compensating them through price increase, their underlined effects on employment will end up being minimal.
1.5 Aim of the Thesis
The extent of advantages and disadvantages of having a minimum wage in a country depends on different factors, including of the country’s economic development, and the organization of its labour market. This research aims to examine in more depth the advantages and disadvantages of implementing a minimum wage in countries like Sweden. Also, we will present more comprehensive knowledge about minimum wage, unemployment, and employment rate. The aim of the thesis is to present a literature review of this research area, by working through the following points:
• Understand how minimum wage is correlated with employment and unemployment. • Investigate minimum wage benefits or harm.
• Find a potential conclusion through theoretical analysis and empirical research evidence.
1.6 Limitations
We decide not to investigate all the countries in the world. We limited our empirical research evidence in minimum wage to selected countries in Asia and Europe to investigate how they have been affected by a minimum wage. Because of time constraints, in the theoretical research we did not look at how job search effort and unemployment would be affected in Sweden.
1.7 Methodology
For the research, we will begin with a theoretical investigation on the minimum wage, using the simple classical model, the monopsony model and labour market with frictions from Cahuc at el (2014, chapter 12). Then we gather information from journals and research papers related to how the minimum wage affects various countries that have adopted it. The purpose is to see if there is clear evidence of negative, positive or mixed effects from introducing a minimum wage. We hope to find the result from empirical research and theoretical research that could result in a conclusion of the effect in introducing a minimum wage in Sweden.
1.8 Structure of the Thesis
The thesis is divided into 3 sections. First section 2 is investigating relevance of the minimum wage. Second section 3 is looking at theoretical research of the simple classical model, the monopsony model and the model with frictions to see how a minimum wage effects on welfare and unemployment. Then in section 4, we overview empirical research in various countries in Asia and Europe regarding minimum wage, and describe an empirical research study by Li, Geraghty, Mehta, Rothwell.
2 Relevance of the Minimum Wage
The figure 1 below is a diagrammatic illustration of the inflation-adjusted wages, the research was conducted in United State on the effects of minimum wage. The graph has been
produced for three groups of employees, with the first one being those receiving extremely low wages. The second group are those receiving medium wages, with the final group being those entitled for highest wages. From the later 1970’s to 2013, there has been a rise in the size of the group of workers entitled for highest wages. At the same time, there has been stagnation in the middle wages, alongside a decline for those entitled for low wages.
Effects of Minimum Wages on Population Health Source: www.healthaffairs.org
According to Ferraro, Meriküll and Staehr (2018), the proponents of the minimum wage rate are of the view that the ever-rising corporate profits together with the falling shares set aside for workers would see workers registering additional more income from the additional profits. The additional profits will cause the rise in the minimum wages, and this was supported with the study by Doug Hall and David Cooper (2013) that minimum wage would increases consumer spending and boosts the economy. They continue the argument claiming that increasing minimum wages by 2% e.g. $2.55 would increase the earnings of low wage workers, would also encourage more people to work, leading to the raise in GDP by $40 billion and employment. Besides this, the proponents of the minimum wages are arguing that the disproportionate recording in the gender in line with the low wages can be addressed through implementation of the minimum wage rate.
In response to the above arguments, opponents of the minimum wage rates have raised their concerns alongside the same. For instance, they argue that raising the minimum wage could have several negative consequences that would lead to inflation, making companies less competitive and the result would be job losses. For instance, the works of Fernandez-Macias and Vacas-Soriano (2016) have put it clear that a rise in the minimum wage will pave way to high cases of unemployment. They further argue that a rise in the minimum wage will result into few working hours, especially for the low-wage employees. This will see the burden felt by the female employees.
3 The Analysis
3.1 Theoretical Research
This section will describe the three different models. First model, Borjas (2016) shows that a competitive firm will hire to the level where the firm maximize profits. This is where the marginal gain from hiring an extra worker equals the costs of that employment. The second model, the simple classical monopsony model that shows that firm’s set the wage below the competitive wage. Third model, the frictions model, in which the effect of a minimum wage on welfare and labour market participation depends on if the Hosios condition is satisfied. Then the minimum wage can help to develop a better labour market efficiency.
3.2 The Employment Decision in the Short Run and Long Run in Competitive Market
According to Borjas (2016) the employment decision depends on the fact that in the short run a firm cannot increase or reduce the size of its plant. In other words, the firm’s capital stock is constant at some level of K. Each firm can then determine the additional output produced by each worker. To find the additional gain in dollar of what each additional worker produces, we can multiply the marginal product of labour by the price of the output. The quantity is known as the Value of Marginal Product of Labour. The expression on equation (1) is the dollar increase in revenue generated by an additional worker.
𝑉𝑀𝑃𝐸 = 𝑝 × 𝑀𝑃𝐸 (1)
A competitive firm hires all the labour it wishes at a constant wage of w dollars. They will hire to the level where the firm maximize profits. This is where the marginal gain from hiring an extra worker equals the costs of that employment, and it does not benefit from expanding the firm further because the value of hiring more workers is declining. This level is when:
𝑉𝑀𝑃𝐸 = 𝑤 𝑎𝑛𝑑 𝑉𝑀𝑃𝐸 𝑖𝑠 𝑑𝑒𝑐𝑙𝑖𝑛𝑖𝑛𝑔 (2)
Borjas mentioned in the long run, firm’s capital is not fixed. The consequence is that firms can grow or diminish their firm. The firms maximize profits by optimising both how many employees to employ and how much plant and equipment to invest in. So, the effect of a minimum wage has negative effect in a competitive market and reduces the employment.
3.3 The Monopsony Model
The simple and classical model of the monopsony model has one company hiring a number of workers L and applying a technology characterized by an increasing and concave production function F(L). Labour supply is upward sloping, 𝐿𝑠(𝑤), increasing with respect to the wage w. If the firm chooses to pay the wage w, it can hire at the level 𝐿𝑠(𝑤). Thus, we can write the profit function as:
Π(𝑤) = 𝐹[𝐿𝑠(𝑤)] − 𝑤𝐿𝑠(𝑤) (1)
The equation (1) describes when a company want to maximize profit with respect to wage.
From equation (1) we can find the optimal level of 𝑤𝑀and 𝐿𝑀 by maximizing equation (1) of profit with respect to w,
𝑑Π 𝑑𝑤= 𝐹 ′[𝐿𝑠(𝑤)]𝐿𝑠′(𝑤) − (𝐿𝑠(𝑤) + 𝑤𝐿𝑠′(𝑤)) = 0 𝐹′[𝐿𝑠(𝑤)]𝐿𝑠′(𝑤) = 𝐿𝑠(𝑤) + 𝑤𝐿𝑠′(𝑤) 𝐹′[𝐿𝑠(𝑤)] = 𝐿 𝑠(𝑤) 𝐿𝑠′(𝑤)+ 𝑤 𝐹′[𝐿𝑠(𝑤)] = 𝑤(1 + 𝐿𝑠(𝑤) 𝑤𝐿𝑠′(𝑤)) = 𝑤(1 + 1 𝜂) 𝐹′(𝐿𝑀) = 𝑤𝑀(1 + 1 𝑛𝑊𝐿 ) 𝑎𝑛𝑑 𝐿 𝑀 = 𝐿𝑠(𝑤𝑀) (2)
On the right-hand side of the equation is the wage elasticity of labour supply, which is a positive number and defined as 𝜂𝑤𝐿 = 𝑤𝐿𝑠′(𝑤)
𝐿𝑀(𝑤) . In other words, equation (2) is the equivalence between the marginal product of labour and the marginal cost. When in a monopsony market, the marginal cost curve is set above the wage by the cause of the elasticity. This is because, when
a company wants to hire additional workers, it needs to pay more for all the workers that are already hired. As a result, the function 𝐹′(𝐿𝑀) = 𝑤𝑀(1 + 1
𝑛𝑊𝐿 ) is underneath the ordinary labour demand curve 𝐿𝑑(𝑤) defined by 𝐹′(𝐿) = 𝑤. The level of employment is decided by the labour supply. Thus, A monopsony company sets the wage below the competitive wage 𝑤𝑐 and this leads to a lower employment than in competitive equilibrium. A monopsonist company will choose the minimum wage that leads to hiring satisfaction in output at a minimal cost. If a minimum wage 𝑤̅ is introduced, there is a potential that an increase in wage causes an increase in hiring 𝐿𝑠(𝑤̅). On the other hand, if the minimum wage is exceeding the competitive wage there would instead be an adverse effect on employment. Therefore, the relationship between hiring and the minimum wage is not monotonic.
The monopsony model has three characteristics that should be kept in mind. Firstly, pure monopsony is unusual. It occurs only in particular geographical areas where there are small firms and low movement. Secondly, as mentioned above the minimum wage increase is beneficial only if it lies below the competitive wage. Finally, the beneficial consequences effect on jobs of an increase in the minimum wage is higher when the wage elasticity of the labour supply more significant.
3.4 The Frictions Model
We now turn to an examination of the effects of a minimum wage in a labour market with frictions. Investigating the effect, we first need to consider the choice to take part in the labour market. An individual needs to choose between being a jobless searcher and not participating at all. An increase in the welfare of the jobless causes a positive increment in labour market participation. Firstly, let H be the cumulative distribution function of the values expected utilities outside the job market by the total working-age population. All the people whose expected utility outside the job market is lower than the expected utility of a jobless person 𝑉𝑢 choose to participate in the job market. We can therefore define the participation rate as 𝐻(𝑉𝑢). Since H is an increasing function, the participation rate rises with the expected utility of jobless individuals.
We use the simple basic search and matching model. We can denote the expected utility of jobless individuals by 𝑉𝑢 and the corresponding expression for an individual with a job by 𝑉𝑒. Then the Bellman equations can be written as:
𝑟𝑉𝑒 = 𝑤 + 𝑞(𝑉𝑢 − 𝑉𝑒) (3)
𝑟𝑉𝑢 = 𝑧 + 𝜃𝑚(𝜃)(𝑉𝑒− 𝑉𝑢) (4)
Wage is 𝑤, 𝑟 the interest rate, 𝑧 the instantaneous income of a jobless person, q the exogenous job separation rate, 𝜃 the job market tightness, and 𝜃𝑚(𝜃) the job finding rate. As usual the return on being in one of the states (the left-hand sides) is equal to the benefit flow plus the gain or loss of a switch in state, multiplied by the probability of such a switch.
For a firm, the profits Π𝑒 and Π𝑣 expected from a filled job and a vacant job, respectively, are determined by the equations
𝑟Π𝑒 = 𝑦 − 𝑤 + 𝑞(Π𝑣− Π𝑒) (5)
𝑟Π𝑣 = −ℎ + 𝑚(𝜃)(Π𝑒− Π𝑣) (6)
The terms h denotes the expense of having a position unfilled and y is productivity, implying that the flow profit of a filled vacancy is 𝑦 − 𝑤. The interpretations of these equations are like those for (3) and (4).
The condition Π𝑣 = 0 can be expected to always be fulfilled: firms will put out vacancies until the market reaches the point where the profit from a vacancy is pressed down to zero. Given this condition, these two equalities give a relation between w and 𝜃, described in (7). We first demonstrate this.
When Π𝑣 = 0, equation (6) is reduced to
0 = −ℎ + 𝑚(𝜃)Π𝑒 → ℎ
Substituting the equation into equation (5) and rewriting: 𝑟ℎ 𝑚(𝜃)= 𝑦 − 𝑤 + 𝑞(0 − ℎ 𝑚(𝜃)) 𝑟ℎ 𝑚(𝜃)+ 𝑔ℎ 𝑚(𝜃)= 𝑦 − 𝑤 ℎ(𝑞 + 𝑟) 𝑚(𝜃) = 𝑦 − 𝑤
ℎ 𝑚(𝜃)
=
𝑦−𝑤 𝑟+𝑞 (7)This equation can be defined as a labour demand, with the labour market tightness, θ, declining in w. The higher wage makes firms put out fewer jobs on the market.
Now we can determine that maximum of the expected utility of a jobless person with respect to the wage w, using the equation (7) as a constraint. As a reference point we will use the outcome of decentralized wage barging for which the bargaining power of workers, captured by the share 𝛾 of the excess wage, is identical to the elasticity 𝜂(𝜃) = −𝜃𝑚′(𝜃)
𝑚(𝜃) of the matching function with to the jobless rate. The equilibrium rate of job market tightness is then given by
(1−𝛾)(𝑦−𝑧)
𝑟+𝑞+𝛾𝜃𝑚(𝜃)
=
ℎ
𝑚(𝜃) (8)
We will now derive an expression for 𝑉𝑢 and then compare the condition for maximization with (8).
First, solving (3) for 𝑉𝑒:
𝑉𝑒 = 𝑤 + 𝑞𝑉𝑢 𝑟 + 𝑞
Substituting this into equation (4): 𝑟𝑉𝑢 = 𝑧 + 𝜃𝑚(𝜃)(𝑤 + 𝑞𝑉𝑢 𝑟 + 𝑞 ) − 𝜃𝑚(𝜃)𝑉𝑢 Simplifying: 𝑟𝑉𝑢 =(𝑟+𝑞)𝑧+𝜃𝑚(𝜃)𝑤 𝑟+𝑞+𝜃𝑚(𝜃) (9)
Next, using the equation (7) to replace w in equation (9):
𝑟𝑉𝑢 =
𝜃𝑚(𝜃)𝑦+(𝑟+𝑞)𝑧−𝜃𝑚(𝑟+𝑞)ℎ
𝑟+𝑞+𝜃𝑚(𝜃) (10)
Now we are in a position to look for the maximum expected utility of an unemployed individual, by computing the derivative of equation (10) 𝜕𝑟𝑉𝑢
𝜕𝜃 = 0 , which obtained by the following steps:
𝜕𝑟𝑉𝑢
𝜕𝜃 =
(𝑟 + 𝑞 + 𝜃𝑚(𝜃))𝜕𝜃𝜕 [(𝑟 + 𝑞)𝑧 + 𝜃𝑚(𝜃)𝑦 − 𝜃ℎ(𝑟 + 𝑞)] −𝜕𝜃𝜕 (𝑟 + 𝑞 + 𝜃𝑚(𝜃))[(𝑟 + 𝑞)𝑧 + 𝜃𝑚(𝜃)𝑦 − 𝜃ℎ(𝑟 + 𝑞)] (𝑟 + 𝑞 + 𝜃𝑚(𝜃))2
We find the maximum of 𝑟𝑉𝑢, by putting to above equation equal to zero. So, the numerator of the right-hand side sign must be zero.
[𝑟 + 𝑞 + 𝜃𝑚(𝜃)] (𝑦 𝑑 𝑑𝜃(𝜃𝑚(𝜃)) − ℎ(𝑟 + 𝑞)) − 𝑑 𝑑𝜃(𝜃𝑚(𝜃))[(𝑟 + 𝑞)𝑧 + 𝜃𝑚(𝜃)𝑦 − 𝜃ℎ(𝑟 + 𝑞)] = 0 Using that 𝑑 𝑑𝜃 = 𝑚(𝜃) + 𝜃𝑚 ′(𝜃): [𝑟 + 𝑞 + 𝜃𝑚(𝜃)](𝑦[𝑚𝜃 + 𝑚′(𝜃)] − ℎ(𝑟 + 𝑞)) − [𝑚(𝜃) + 𝜃𝑚′(𝜃)]((𝑟 + 𝑞)𝑧 + 𝜃𝑚(𝜃)𝑦 − 𝜃ℎ(𝑟 + 𝑞)) = 0 Simplifying:
−ℎ(𝑟 + 𝑞)2− ℎ𝜃𝑚(𝜃)(𝑟 + 𝑞) + (𝑟 + 𝑞)𝑦𝑚𝜃(𝜃) + 𝜃𝑦𝑚2(𝜃) + 𝜃2𝑦𝑚(𝜃)𝑚′(𝜃) + +𝑦(𝑟 + 𝑞)𝜃𝑚′(𝜃) − 𝑚(𝜃)(𝑟 + 𝑞)𝑧
− 𝜃𝑦𝑚2(𝜃) + ℎ𝜃𝑚(𝜃)(𝑟 + 𝑞) − 𝜃𝑚′(𝜃)(𝑟 + 𝑞)𝑧 − 𝜃2𝑦𝑚(𝜃)𝑚′(𝜃) + 𝜃2𝑚′(𝜃)ℎ(𝑟 + 𝑞)
(𝑟 + 𝑞)[𝑚(𝜃)(𝑦 − 𝑧) − ℎ(𝑟 + 𝑞) − 𝜃𝑚′(𝜃)(𝑧 − 𝑦) + 𝜃2𝑚′(𝜃)ℎ]
Since the term in [ ] must be zero:
(𝑟 + 𝑞)[𝑚(𝜃)(𝑦 − 𝑧) − ℎ(𝑟 + 𝑞) − 𝜃𝑚′(𝜃)(𝑧 − 𝑦) + 𝜃2𝑚′(𝜃)ℎ] = 0 Solving for h: ℎ =𝑚(𝜃)(𝑦 − 𝑧) − 𝜃𝑚 ′(𝜃)(𝑧 − 𝑦) 𝑟 + 𝑞 − 𝜃2𝑚′(𝜃) ℎ 𝑚(𝜃)= (𝑦 − 𝑧) − 𝜃(𝑚′(𝜃) 𝑚(𝜃))(𝑧 − 𝑦) (𝑟 + 𝑞) − 𝜃2𝑚′(𝜃) If we define 𝜂(𝜃) = −𝜃𝑚′/𝑚(𝜃). [1+𝜂(𝜃)](𝑦−𝑧) 1+𝑞+𝜂(𝜃)𝜃𝑚(𝜃)
=
ℎ 𝑚(𝜃) (11)Where 𝜂(𝜃) = −𝜃𝑚′/𝑚(𝜃) is the elasticity of the matching function with respect to the jobless rate.
3.5 Analysis of The Minimum Wage Effect on Welfare and Labour Market Participation
If interpreting the variable w as the (exogenously determined) minimum wage for all with jobs, then equation (7) shows that w is deciding the outcome on the optimal level of the job market thingness 𝜃. When we take the derivative of equation (7), knowing that 𝑚′(𝜃) < 0 𝑎𝑛𝑑 [𝜃𝑚(𝜃)]′ > 0, we see that a rise in the minimum wage lowers the job market tightness 𝜃. Moreover, defining the job finding rate as 𝛼 = 𝜃𝑚(𝜃), it follows that an increase in
minimum wage diminishes the likelihood of finding a job. Companies post fewer jobs available and the job-finding rate decreases off.
Now, comparing equations (8) and (11) indicates that the expected utility of jobless individuals is maximized when the minimum wage is determined at a level that is corresponding to the wage level of the decentralized economy in which the bargaining power limitation satisfies the Hosios condition.1
(1−𝛾)(𝑦−𝑧)
𝑟+𝑞+𝛾𝜃(𝜃)
=
ℎ
𝑚(𝜃)
(12)
where the 𝛾 = 𝜂(𝜃) is the bargaining power parameter.
We use 𝑤∗ to denote the level of negotiated wage when the Hosios condition is satisfied. On condition that 𝑤 < 𝑤∗, we see that any rise in the minimum wage rises participation and the jobless rate but has uncertain consequences on working individuals. However, when the bargaining power of workers is low to respond (𝛾 < 𝜂(𝜃)), a rise in the minimum wage rises the welfare of the jobless. The welfare of the jobless achieves a maximum when the Hosios condition is satisfied (𝛾 = 𝜂(𝜃)). Thus, the minimum wage can help to raise the well-being of those without a job.
However, if 𝑤 ≥ 𝑤∗ it has a negative effect. The minimum wage hike leads to a decline in job market participation and an increase in joblessness that leads to a deceased job opportunity.
1 Hosios condition describes that only a value of worker bargaining power identical to the elasticity of the
4 Minimum Wage Benefit and Harm
In this section, we will give a comprehensive survey of empirical result of minimum wage effects in various countries.
4.1 Empirical Research Evidence in Minimum Wage Effect in Various Countries Germany
According to Marco Caliendo et al. (2018) Germany introduced a minimum wage for the whole country on the first of January 2015. The minimum wage was set at €8.50 an hour. They intend to decrease the poverty level in Germany. The proposal to increase the minimum wage was substantially disputed. Caliendo present how opposition parties in Germany said that an increase in the minimum wage can cause possible complications, that there are too many uncertainties with raising the minimum wage. Even so, the proponent parties explained that one reason for the increase is the importance of making citizen less dependent on the government social benefit. Caliendo et al found three conclusions after the introduction of the new minimum wage. First and second years after the statutory minimum wage rise, workers hourly wage at the bottom of the distribution had improved. Especially for foreign-born, low educated, and women in Germany. On the other hand, it turned out that a substantial number of companies did not follow the legislation. During 2016 more than 750.000 workers were having their wage lower than the newly set minimum wage. Lastly, they argued that there is a small negative impact on total employment in the short run. The long-run effect from the minimum wage is not clear because it is too early to draw a conclusion.
Hungary
Peter Harasztosi and Attila Lindner (2019) executed a similar examination as Marco Caliendo at el (2018) and came to matching result for Hungary. They gathered data from balance sheets and tax authorities. Haraztosi and Lindner stated that Hungary had the ratio of a minimum wage to the median at around 35%, which is equivalent to United states between 1996-2000. Remarkably, when Hungary introduced a new minimum wage level in 2000 the ratio increased substantially for two years to 55%, which is equal to France’s minimum wage level. They claimed that the rise in minimum wage caused a 10% reduction in low skilled employment. Harasztosi and Lindner use a regression method suggested by Manchin at el (2003) and Draca at el (2011) which described the employment effect of the minimum wage.
Overall, the finding is that companies responded to the increased minimum wage by reducing the employment rate. Their estimation suggested that of 290.000 minimum wage workers in Hungary, about 30.000 will lose their works. Meanwhile, the remaining 260.000 workers experience an increase in the wage by 60%. Companies would likely experience growth in total labour cost. However, they said that the ideal minimum wage depends on businesses, municipalities and countries. For example, they emphasized countries with work related to low wages that had a connection to regional service sector will be unharmed or have limited losses on employment. Likewise, they concluded that municipalities with wealthy citizen experience benefit from low wage workers. Finally, they stated that setting minimum wage conditional on specific industries is a good idea, because in non-tradeable sectors in counties the minimum wage could be increased continuously, without losing in employment. In the different tradable sector is difficult to increase the minimum wage without effecting the employment rate in countries. For example, they mentioned Austria and Italy that had implemented specific industries minimum wage level.
Lithuania
Lithuanian labour market had a statutory minimum wage and an increase in the minimum wage level recently, according to Algirda Bartkus (2017). He suggested that a minimum wage had a moderate negative impact on the labour market. Bartkus argued that the labour market is dependent on the surplus wage and not on the minimum wage. The surplus wage is the difference between average wage and the minimum wage or the variation of average wages from the minimum wage. Although the gap has limitation, too wide a gap will cause unemployment. He argued that a static gap between the surplus wage and the minimum wage is the optimum. Bartkus concluded with a rise in the minimum wage leads to higher prices for consumers, and they will not benefit from any other likely effect. Bartkus argument goes hand in hand with Kawgacuhi and Mori who concluded that an increase in the minimum wage is not optimal, instead they suggest using another method to alleviate poverty.
Japan
A study by Daiji Kawaguchi and Yuko Mori (2009), examines if minimum wage is an effective anti-poverty policy in Japan. They argued that there are two kinds of minimum wage structure: A regional minimum wage and industry minimum wage. Regional minimum wage is related to all employed workers, while industry minimum wage is set differently depending on the specific industry in Japan. Kawauchi and Yuko found that a minimum wage decreases work
for male in youth and middle-age women. The effect on both is small and moderate from the rise in minimum wage. Secondly, they analysed how the minimum wage effect on people aged 16-17 year by gathering data on how many at this age were in high school without work. This number was 93%, while with part-time work 2.5%, not in high school and working 5%, and lastly 1.7% were neither in school nor working.
Furthermore, they used an experimental model of minimum wage constructed by Neumark and Wascher (1995). The results showed that workers that are not in school and employed, are not affected by a rising minimum wage, although youths that were working and in school decreased by 1.359%. It is a significant increase because only 2.5% were working before the minimum wage change. Finally, they examined the likelihood of young people still out of school and working as a result of the increase in minimum wage increased from the data collection. Altogether, minimum wage will not be supportive for improving anti-poverty in Japan, as a result of the minimum wage is not targeting the low-income family and will diminish the working time for a less skilled worker. Thus, Kawaguchi and Mori suggested the implementation of a more direct policy to combat poverty. One possibility is wage tax credit.
Singapore
Singapore has been ranked a top competitive nation (IMF, 2018). They also had a low unemployment rate of 2.9% and inflation 1.6% until 2010, according to Weng Tat Hui (2013). Despite the low unemployment rate and inflation, low wage workers had not been benefited by the cause of rapid technological change in Singapore. Whereas the demand for skilled workers has increased steadily. The spread in inequality had climbed. Hui argued that the conventional idea of introducing a minimum wage does not increase unemployment. Since Singapore is unique in the sense of having sizable foreign workers to local workers, however, he suggested proposing minimum wage will benefit the government in influx of foreign labour, hence reducing public assistance. Also, higher minimum wage will improve better job matching for companies looking for foreign workers. He also argued that companies experience sustained boost of morale and productivity. Singapore will continue with having high productivity and competitiveness in the prospect. However, the government and Union had different conclusions. The government stand by their Workfare Income Supplement (WIS), which is designed based on tax credit. Hui said the government argued WIS improved better for low wage earners than implementation of minimum wage. Hui argued that WIS in the short run on employment has no negative effect, but a salary subsidy by the government could make
companies continue employing workers at low wages. WIS scheme could stimulate freelancers to declare a lower wage and take advantages from WIS.
Additionally, he mentioned that the government should introduce a standard model of national minimum wage that applies to all employed. The minimum wage does not solve all issues with low wage workers and poverty. He advocated that the government should implement a social safety net; those included credit scheme and insurance scheme. The credit scheme is modelled to help workers when they become unemployed for unintentional cause and would be covered for six months—insurance scheme which will function as a substitute for the wage gap from the old employment to new employment.
Hong Kong
Hong Kong is like Singapore competing for the top spot in competitiveness ranking (WEF, 2018). However, like Singapore, Hong Kong suffers from growing inequality stated Hung Wong and Shengquan Ye (2015). The government introduced a minimum wage in 2011 and set a minimum hourly wage at 28HKD. Wong and Ye investigated whether the minimum wage would help to close the gap of inequality in Hong Kong. They randomly selected individuals that had to answer questions related to wage rate, working hours, monthly income, pay stratification, job satisfaction, and quality of life before the minimum wage in 2011 to perceive the effect after the minimum wage introduction after 6-8 months in 2012. Altogether, the study showed that participants had benefited after the introduction of the minimum wage and with no effect on unemployment. Since the monthly wage increased for participants, their quality of life has seen improvements. Conversely, the increased hourly wage had caused adverse effect on working hours, low wage workers are working more after the minimum wage.
Thailand
The above study by Daiji Kawaguchi and Yuko Mori (2017) for Japan said that there are two kinds of minimum wage, namely national minimum wage and regional minimum wage. Thailand is one of the counties in Asia that has adopted the regional minimum wage and later adopted a national minimum wage in 2011, according to Ximena Del Carpio at el (2014). They said that developing countries are more complex than developed countries, two reasons are because those countries have substantial non-compliance and uncovered sectors. By uncovered sectors they mean jobs that are not entitled to the minimum wage regulation. Thailand passed a minimum wage legislation in 1972. The minimum wage was set at 12 baht in 1973 in
Bangkok and later in 1998 Thailand had set minimum wage by province. Finally, in 2011 they adopted the national minimum wage model. For their investigation, they gathered data between 2001-2010 from The Labour Force Survey (LFS) and Socio-Economic (SES) to examine the effect before the national minimum wage. Carpio at el used two econometric models for estimating the effect of minimum wage. The outcomes from the modelling found that registered companies in Thailand had a high non-compliance following minimum wage legislation and higher chance of people working in the uncovered sector, especially citizen that are youth, elder, and with low education background. Though, they did find that minimum wage legislation improved conditions for citizen at the lowest end of the distribution.
5 Implications for Sweden
From the above, we understand that increase or decrease in the minimum wage leads to either a negative or positive effect on the welfare and labour market participation. This is consistent with the findings by Algirda Bartkus (2017), who identified that the minimum wage hike depends on the surplus wage gap and the minimum wage. An increase in wage, w, could be explained as the minimum wage in Sweden. Introducing a minimum wage in Sweden is beneficial. However, not all industries should have a minimum wage. Jobs in Sweden that are in equilibrium should not have a minimum wage. According to Arbetsförmedlingen (2019), jobs that are hardest in degree level within one to five years to find are bank, assistant, estate agent, photographer, graphic designer, communicators person, pr-specialist and musician. Furthermore, professions within other levels of education that are hard to find are station staff, shop sales, economic assistant, cashiers, advertisement distributors, travel agent and doorkeeper. These jobs should not have a minimum wage because they will harm employment. Sweden should, therefore, not introduce a national minimum wage level. However, the Swedish government could alternatively use the finding that also Marco Caliendo at el (2018) emphasized, namely that specific industry minimum wage levels could be beneficial. Using the specific industry minimum wage level, Sweden could introduce a minimum wage for jobs that have the most shortage of labour. If we diverge from that monopsony occurs only in particular geographical areas where there are small firms and low movement.
The introduction of the minimum wage could improve welfare and labour market participation. As reported by Arbetsförmedlingen (2019), the Swedish government should consider introducing a minimum wage for midwife, preschool teacher, teachers in high school level, psychologists, nurses, and social workers. Because these jobs have the lowest possibility of 𝑤 ≥ 𝑤∗ and that equation (8) profit 𝑟Π
𝑒 is not negative. These jobs are beneficial from an introduction to the minimum wage.
In case the Swedish government wants to improve poverty by presenting a minimum wage, it is not an effective way of improving poverty. The Swedish government needs to make additional changes other than presenting a specific industries minimum wage for anti-poverty.
6 Conclusion
In a competitive market, a minimum wage has a negative effect on employment. The simple classical monopsony model showed that a monopsony company sets the wage below the competitive wage. This leads to lower employment than for a competitive wage. So, a minimum wage could help to increase employment if the monopsony assumptions are valid. In our investigation on the effects of a minimum wage in a labour market with frictions, we found that a minimum wage could improve labour efficiency if the Hosios condition is satisfied (γ=η(θ)). Furthermore, this was not inconsistent with the empirical literature review that we investigated. For instance, in Thailand well-being improved for citizens at the lowest end of the distribution and in Hong Kong low monthly income increased. Other countries had a negative effect from a minimum wage. In general, A minimum wage introduction could improve monthly income in countries, if the country’s government correctly performs it. Lastly, the Swedish government could benefit from a specific industry minimum wage level if the government sets minimum wage adequately. For instance, Swedish jobs related to midwife, preschool teacher, teachers in high school level, psychologists, nurses, and social workers.
7 References Arbetsförmedlingen, ”listan med de hetaste yrkena 2024”, 2019,
https://arbetsformedlingen.se/om-oss/press/pressmeddelanden?id=47666C2062FEFB32.
Bartkus, Algirdas. "The minimum wage and the Lithuanian labour market." Economics of Transition 25.1 (2017): 47-75.
Boffey, D., 2020. EU Will Not Force Statutory Minimum Wage On Nordic Countries. the Guardian. https://www.theguardian.com/world/2020/jan/15/eu-will-not-force-statutory-minimum-wage-on-nordic-countries, 6 April 2020.
Borjas, G., 2016. Labor Economics. 7th ed. New York, NY: McGraw-Hill Education.
Cahuc, Pierre, Stéphane Carcillo, and André Zylberberg. Labor economics. United States of America, MIT press, 2014.
Caliendo, Marco, Carsten Schröder, and Linda Wittbrodt. "The causal effects of the minimum wage introduction in Germany–an overview." German Economic Review 20.3 (2019): 257– 292.
Carlgren, F., 2016. Internationellt Höga Lägstalöner - Ekonomifakta. Ekonomifakta. https://www.ekonomifakta.se/Artiklar/2016/januari/internationellt-hoga-lagstaloner Accessed 6 April 2020.
David Cooper and Douglas Hall (2013). "Raising the federal minimum wage to $10.10 would give working families, and the overall economy, a much-needed boost" Economy policy institute. https://www.epi.org/publication/bp357-federal-minimum-wage-increase/ Accessed: 29 May 2020
Del Carpio, Ximena V., Julián Messina, and Anna Sanz‐de‐Galdeano. "Minimum wage: Does it improve welfare in Thailand?." Review of Income and Wealth 65.2 (2019): 358-382.
Fernandez-Macias, Enrique, and Carlos Vacas-Soriano. "A coordinated European Union minimum wage policy?." European Journal of Industrial Relations 22, no. 2 (2016): 97-113.
Gottfries, N., 2013. Macroeconomics. Basingstoke: Palgrave Macmillan.
Harasztosi, Péter, and Attila Lindner. "Who Pays for the minimum Wage?" American Economic Review 109.8 (2019): 2693-2727.
Hui, Weng Tat. "Economic growth and inequality in Singapore: The case for a minimum wage." International Labour Review 152.1 (2013): 107-123.
Kawaguchi, Daiji, and Yuko Mori. "Is Minimum Wage An Effective Anti‐Poverty Policy In Japan?." Pacific Economic Review 14.4 (2009): 532-554.
Ilsøe, Anna. "From living wage to living hours–the Nordic version of the working poor." Labour & Industry: a journal of the social and economic relations of work 26, no. 1 (2016): 40 57.
Mabbett, Deborah. "The minimum wage in Germany: what brought the state in?." Journal of European Public Policy 23, no. 8 (2016): 1240-1258
Nilsson, Annika, 2019. Kollektivavtal lo.se.
http://www.lo.se/start/loner_arbetsmiljo_och_avtal/kollektivavtal, 6 April 2020.
Skedinger, Per. “Ogenomtänkt Förslag Om Minimilön i EU.” SvD, 6 Jan. 2020, https://www.svd.se/ogenomtankt-forslag-om-minimilon-i-eu.
Schwab, Klaus. "The global competitiveness report 2018." World Economic Forum. 2018.
Simona Ferraro, Jaanika Meriküll, and Karsten Staehr. "Minimum wages and the wage distribution in Estonia." Applied Economics 50, no. 49 (2018): 5253-5268.
Stigler, G., 1946. The Economics of Minimum Wage Legislation, The American Economic Review 36.3: 358-365.
Wong, Hung, and Shengquan Ye. "Impact of enforcing a statutory minimum wage on work and quality of life of vulnerable groups in Hong Kong." International Journal of Social Welfare 24.3 (2015): 223-235
