The Labor Impact of Minimum Wages: A Method for Estimating the Effect in Emerging Economies using Chilean Panel Data

Abstract

We develop and use a statistical matching technique to construct a panel data set from the Chilean National Employment Survey; and then use this panel to test the short term impacts of minimum wage increases during the 1996-2005 period.We estimate wage increase effects for the treated group (people earning wages between ex ante an ex post minimum wages), the hours worked and the employment effects for this group. We also estimate the effect on the proba- bility of obtaining a job for a theoretical treated group of unemployed and inactive workers constructed by estimating their likely wage in the case that they found one. We then estimate the integral of these three effects (wage increase, wage loss and lower probability of obtaining a job). We find that minimum wage increases do have a significant impact on the wages of the treated group, hence the suspicion that they are somehow made irrelevant by informal practices in Chilean labor markets seems to be unfunded. We find that there is a significant negative effect on the probability of staying employed, a negative effect on hours worked and a signifi- cant negative effect on the probability of finding the job. We find that the integral of the three effects is positive and has statistical significance. We conclude that, in general, minimum wage increases in Chile during the aforementioned period have increased the real income of treated and potentially treated workers. However, we also find that there is a redistribution of income among these workers in favor of currently employed workers. We submit our results to several robustness checks including a variety of definitions of income and wages, a continuous changing control group, a “dif-in-dif” approach and a pressure and distance.approach. We conclude that, if anything, minimum wage increases have generated real income redistribution towards the treated workers as well as among them in Chile.