Minimum wages & the working poor. Poverty consequences of job polarization. Sem Vandekerckhove Belspo, Brussels 15/5/2018

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1 Minimum wages & the working poor Poverty consequences of job polarization Design Charles & Ray Eames - Hang it all Vitra Sem Vandekerckhove Belspo, Brussels 15/5/2018

2 A minimum wages against poverty: obvious or unconventional? Apparent logic: low wages lead to poverty, low-wage countries and low-wage industries have more poverty But minimum wages do not always target the poor (second income, middle class, etc.) Three questions: What is the distributional effect of MW? What is the employment effect of MW? Could minimum wages prevent IWP? Wage poverty line L D U L S G F N X D Jobless poverty In-work poverty Employment

3 Data Administrative panel data with wage information from NOSS (RSZ-LATG/DMFA) Sal100: basic wage Estimation of holiday allowance Period: quarterly, from 1996 (wage norm) to 2015 Sampling algorithm: 20% of outflow Checked with SES (Viona) Minimum wage information from FOD WASO/Acerta 44 joint committees Before 2000 estimated with ICL Low-wage < 2/3 annual national median wage

4 Low-wage work in Belgium Percentage q1 2000q1 2005q1 2010q1 2015q1

5 Employment by joint committee q12000q12005q12010q12015q q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1

6 Sectoral wage floors q12000q12005q12010q12015q q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1 1995q12000q12005q12010q12015q1

7 Low-wage work by joint committee

8 Low-wage sectors have low average wages Share of low-pay jobs Average wage

9 Nr Paritair comité Aandeel 327 Beschutte werkplaatsen en de sociale werkplaatsen Zelfstandige kleinhandel Aanvullend PC arbeiders Tuinbouwbedrijf Grote kleinhandelszaken Gesubsidieerde inrichtingen van het vrij onderwijs Kappersbedrijf en de schoonheidszorgen Socio-culturele sector Uitzendarbeid Textielverzorging Kleding- en confectiebedrijf Kleinhandel in voedingswaren Vervoer Handelsluchtvaart Makelarij en verzekeringsagentschappen Hotelbedrijf Garagebedrijf Apotheken en tarificatiediensten Bouwbedrijf Aanverwante metaal-, machine- en elektrische bouw Aanvullend Nationaal Paritair Comité voor de bedienden Gezins- en bejaardenhulp Warenhuizen Handel in voedingswaren Glasbedrijf Aanvullend Paritair Comité voor de bedienden Papier- en kartonbewerking Stoffering en de houtbewerking Schoonmaak- en ontsmettingsondernemingen Textielnijverheid en het breiwerk Voedingsnijverheid Opvoedings- en huisvestingsinrichtingen en -diensten 1.13

10 Distributional effects of minimum wages Binding minimum wages take a bite out of the wage distribution Kaitz-index: MW/w(p50) This leads to a spike and spillovers (Autor, Manning & Smith, 2014) We have found a symmetric compression effect ( compensation ) Beta Percentile

11 Effect of a 1-10% minimum wage change on the share of low-wage work.1.09 Low-wage share q11998q12000q12002q12004q12006q12008q12010q12012q12014q1

12 Effect of a 1-10% increase of the national minimum wage on the share of low-wage work.1.09 Low-wage share q11998q12000q12002q12004q12006q12008q12010q12012q12014q1

13 p10/p90 inequality wnq1090 wfnq q1 2000q1 2005q1 2010q1 2015q1 p20/p80 inequality wnq2080 wfnq q1 2000q1 2005q1 2010q1 2015q1 Inequality Inequality Wage mass 10/90 FTE wage 10/90 Wage mass 20/80 FTE wage 20/80 Wage mass 50/90 FTE wage 50/90 Wage mass 10/50 FTE wage 10/ q1 2001q3 2007q1 2012q3 2018q q1 2001q3 2007q1 2012q3 2018q1

14 Minimum wage effect on employment Standard supply & demand: downward sloping LS Profit maximizing monopsonist:! = # $ &($) FOC: # = *&$ *&$ = $ Flows approach: Hiring* = quits* More affected: Low-wage workers Teenagers, migrant workers W W mw W mon L d L mon L mw MC mon L s L

15 Employment effect Similar to Brochu & Greene (2011, 2014) Individual probability probit flow = fc(log SMW), controlled for gender, age, sector FE+trend Elasticity = marginal effect: Different margins (all sig.) Grand Gender, age, gender x age Low-wage workers Results: inflow > outflow!"( $%&')!) = +(,-)-

16 Regression results annual Outflow population T M V T.01ns.00ns.02ns ns -.06ns -.02ns ns.02ns.03ns ns.00ns -.02ns Low W.06ns Normal W.01ns R2 10.1% N 638,766 Inflow population T M V T ns Low W.29 Normal W.16 R2 16.1% N 644,428

17 Regression results annual Outflow sector (jc) T M V T.04ns.03ns.05ns ns -.03ns.04ns ns.05ns.06ns ns.04ns.02ns Low W.10 Normal W.04ns R2 10.1% N 638,766 Inflow sector (jc) T M V T Low W.34 Normal W.21 R2 15.7% N 644,428

18 Regression results quarterly Outflow population T M V T ns Low W.16 Normal W.03 R2 13.6% N 2,663,062 Inflow population T M V T Low W.18 Normal W.05 R2 15.5% N 2,669,067

19 Regression results quarterly Outflow sector (jc) T M V T Low W.17 Normal W.04 R2 13.4% N 2,663,062 Inflow sector (jc) T M V T Low W.19 Normal W.05 R2 15.1% N 2,669,067

20 The relation between minimum wages and employment at the sector level ln# = % ln & ',) & *+,) % can be interpreted as an elasticity (log-log). % 12) may suffer from omitted variable bias: productivity growth leading to wage claims and employment growth. % 3)2) is a pseudo-iv estimator, using only exogenous variation in ln 4 5,6 4 78,6 due to indexation. It turns out the causal relation also runs from employment (or productivity) to wages so minimum wages are endogenous!

21 Results Total employment OLS (1) OLS (2) OLS (3) OLS (4) 2SLS (1) 2SLS (2) 2SLS (3) 2SLS (4) beta p time trend fixed effect sector x time n R Low-wage employment OLS (1) OLS (2) OLS (3) OLS (4) 2SLS (1) 2SLS (2) 2SLS (3) 2SLS (4) beta p time trend fixed effect sector x time n R

22 Job polarization and poverty consequences Desindustrialisation: routine manual work replaced by machines. Job polarization: routine nonmanual work replaced by computers. Job loss in the middle class Increased S&D for low-wage jobs: no change? Future: AI replacing non-routine non-manual work. Hypothesis: JP should affect the middle class. However, no clear sign of a widening gap between p60 and p40. We therefore project current growth on 2025, Wage mass FTE 1996q1 2001q3 2007q1 2012q3 2018q1

23 Simulatie year lownr n share pc pc3d n2015 n2025 n2035 lownr2015 lownr2025 lownr2035 smw lowwage 201Zelfstandige kleinhandel Beschutte werkplaatsen en de sociale werkplaatsen Grote kleinhandelszaken Aanvullend Nationaal Paritair Comité voor de bedienden Socio-culturele sector Vervoer Hotelbedrijf Kleinhandel in voedingswaren Bouwbedrijf Aanverwante metaal-, machine- en elektrische bouw Opvoedings- en huisvestingsinrichtingen en -diensten Garagebedrijf Makelarij en verzekeringsagentschappen Handel in voedingswaren Voedingsnijverheid Apotheken en tarificatiediensten Schoonmaak- en ontsmettingsondernemingen Scheikundige nijverheid Metaalfabrikatennijverheid Audiovisuele sector Textielverzorging Voedingsnijverheid Scheikundige nijverheid Papier- en kartonbewerking Stoffering en de houtbewerking Banken Warenhuizen Kleding- en confectiebedrijf Groothandelaars-verdelers in geneesmiddelen Cementbedrijf Non-ferro metalen Verzekeringswezen IJzernijverheid Textielnijverheid en het breiwerk Steenbakkerij Drukkerij-, grafische kunst- en dagbladbedrijf Hypothecaire leningen, sparen en kapitalisatie Petroleumnijverheid en -handel Glasbedrijf Textielnijverheid en het breiwerk Kleding- en confectiebedrijf

24 Conclusions Minimum wages effects Compression of the wage distribution Net increase of low-wage employment (H > Q) The growth of specific industries with low wages poses risks for increased numbers of low-pay workers / in-work poverty Limitations Combined effect employment & inequality Minimum wages may be endogenous!

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