Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 877: The Rate Of Substitution Between Low Pay Workers and The National Minimum Wage

Gauthier Lanot () and Panos Sousounis ()
Additional contact information
Gauthier Lanot: Department of Economics, Umeå School of Business and Economics, Postal: Umeå University, S 901 87 Umeå, Sweden
Panos Sousounis: Keele Management School, Economics, Postal: Keele University, United Kingdom

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

JEL-codes: J21; J31

36 pages, February 20, 2014

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