The Rate Of Substitution Between Low Pay Workers and The National Minimum Wage

Gauthier Lanot and Panos Sousounis

No 877, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: We study the effect of the National Minimum Wage (NMW) on the workforce composition, in terms of distinct age groups with similar qualifcations, within the low paying sectors of the economy. Our interest is in the degree of substitutability between labour inputs (young and old employees) in the production process. We find evidence that both the introduction and regu- lar uprating of the NMW have a signifcant effect on determining observed changes in average wages for age groups older than 16-17 years of age. However, our results show that the effects of the NMW and its uprating on the sectoral cost of labour are rather weak and we conclude that, if any, the influence of the NMW has to be small and limited to the very young (16-17 year olds) or the 18-20 year olds. We estimate the elasticity of substitution, between 18-20 year olds and old workers, to be around 0.2-0.5, which would imply signifcant complementarity (or at least argue against perfect substitution) between younger and old employees.

Keywords: labour substitution; minimum wage (search for similar items in EconPapers)
JEL-codes: J21 J31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-02-20
New Economics Papers: this item is included in nep-eur, nep-lab and nep-lma
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