Minimum wage effects on youth employment in the European Union

Abstract

The purpose of this article is to estimate minimum wage effects on youth employment in the European Union (EU). The analysis employs a panel regression method with fixed effects and uses data for 18 EU member states with statutory minimum wage over the period 1996 to 2011. The analysis is restricted to teenage workers between 15 and 19 years of age and young workers between 20 and 24 years of age. The study finds a negative, statistically significant impact of minimum wage on youth employment, by which the disemployment effect appears to be stronger for teenage workers. The effect remains negative and statistically significant also when controlled for other labour market institutions. Taking into account empirical results, we can conclude that EU countries should be more cautious when setting up minimum wages for young workers, as disemployment effects may have been downplayed.

Keywords:

• minimum wage
• youth employment
• labour market
• European Union

JEL Classification:

• J30
• J33
• J38

Notes

¹ The panel includes Belgium, Czech Republic, Estonia, France, Greece, Hungary, Ireland, Latvia, Luxembourg, Lithuania, the Netherlands, Poland, Portugal, Romania, Slovenia, Slovak Republic, Spain and the United Kingdom. Bulgaria and Malta were left out of the analysis due to the lack of data.

² Decision on the length of the study period was motivated by two facts: (i) availability of data; (ii) going further back in the past would not bring clear results in most of the NMS due to changed political and economic situation (see Jerman et al., 2010). For the United Kingdom and Ireland we include data from the introduction of minimum wage afterwards, i.e. from 1999 and 2000, respectively.

³ There was a lack of data on labour market institutions for Latvia, Lithuania, Luxembourg and Romania.

⁴ The presence of heteroscedacity and autocorrelation was confirmed by likelihood-ratio test and Wooldrige test, respectively (see Wooldridge, 2002).