The effects of minimum wage on unemployment for OECD countries: a dynamic fixed effects panel threshold model perspective

Abstract

The purpose of this paper is to shed new light on the incidence of the minimum wage on the unemployment rate on 33 OECD countries during 1980–2020 period applying a dynamic fixed effects panel threshold model. Controlling for the usual macroeconomic and demographic factors, the best model estimates a minimum wage threshold of 9.1667. Specifically, the higher the minimum wage the lower the unemployment rate, however the marginal effect is larger above the threshold value. A single-threshold model is identified for 25–74, secondary and long-term unemployment. The possibility of a double-threshold model is rule out for all the unemployment indicators.

Keywords:

• Minimum wage
• unemployment
• dynamic fixed effect panel threshold model

JEL classification codes:

• E2
• E24
• C23
• C61
• J21

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 According to Dube et al. (2010), Allegretto et al . (2011) or Addison et al . (2012), this table offers the estimations including time effects as part of the dynamic fixed effects panel threshold model.

2 This result is in line with Fedeli and Forte (2012) in which the authors show how high public deficits (inclusive of the repayment of interests, particularly if it is accompanied by high public expenditures and taxation) are likely to aggravate unemployment rate during 1981-2009 period for 19 OECD countries, suggesting that non-Keynesian fiscal theories more oriented to reducing too large public spending are needed. In other words, public debt can generate a burden for future generations due to future taxpayer´s burden and therefore this situation translates into greater unemployment. According to Buchanan (1978), excessive burden of public debt may be dangerous and an important example was in the 2007-2009 crisis, in which the risk of debt default hit Greece, Italy, Portugal, Ireland and Spain achieving higher unemployment rates.

3 According to Manning (2021), I consider a more extended group, the 15-24 age group.

4 The highest minimum wages countries are: Luxembourg, France, Belgium, Austria and Netherlands. The lowest minimum wages economies are: Latvia, Mexico and Chile.

5 The results are not shown here due to space restrictions but are available from the author upon request.