The Impact of Minimum Wage on Average Earnings in the Caribbean using Two-Selected Countries, Trinidad and Tobago and Jamaica (1980-2011 and 1997-2011)

Bamikole, Oluwafemi (2013): The Impact of Minimum Wage on Average Earnings in the Caribbean using Two-Selected Countries, Trinidad and Tobago and Jamaica (1980-2011 and 1997-2011).

Abstract

This paper examines the impact of minimum wages on average wage earnings in two selected countries, Trinidad and Tobago and Jamaica using a time-series data for the latter and a panel data for both. The methodology of GMM time-series estimation is used on the Jamaican data (1980-2011) and a Two Stage Least Square Regression model is used for the panel data (1997-2011). The impacts of minimum wage on average earnings are mixed. In the time-series model, the real minimum wage has a negative and significant impact on the real average earnings, a unit change in the minimum wage decreases earnings by $2. However, in the panel model, the minimum wage positively impacts the real average wage by the same amount. Thus, the minimum wage alone cannot be used to boost average earnings; emphasis needs to be placed on the productivity of workers and the cost of doing business in the Caribbean.

• Item Type: MPRA Paper
• Language: English
• Keywords: GMM, Two-Stage Least Squares, Minimum Wage, Average Earnings
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling; J - Labor and Demographic Economics > J0 - General; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs

References

Aaronson, D., et al (2009). The Spending and Debt Response to Minimum Wage Hikes. Retrieved from http://faculty.chicagobooth.edu/erik.hurst/teaching/minwageecons160.pdf

Acemoglu, D. (1996) Good Jobs versus Bad Jobs: Theory and Some Evidence. Retrieved from http://espace.mit.edu/bitstream/handle/1721.1/63687/doodjobsversusba00acem.pdf?sequence=1

Addison, et al (2008) New Estimates of the Effects of Minimum Wages in the U.S. Retail Trade Sector. Institute for the Study of Labour (IZA) retrieved from http://ftp.iza.org/dp3597.pdf

Akerlof, G. & Yellen, J. (1986). Efficiency Wage Models of the Labour Market.Cambridge:Cambridge University Press.

Bellante, D. (1994), “Sticky Wages, Efficiency Wages, and Market Processes”. The Review of Austrian Economics, Vol.8, No.1: 21-33

Blanchflower, D.S. and Oswald, A.J. (1994). The Wage Curve: An Entry into the New Palgrave. 2nd edition retrieved from http://www.andrewoswald.com/docs/palgravewcfeb06.pdf

Brown, T.C., Gilroy, C., and Kohen, A. (1982) “The Effect of the Minimum Wage on Employment and Unemployment”, Journal of Economic Literature, Vol. 20 (2), 482-528

Card, D., Krueger, A. (1994). “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennyslvania”. American Economic Review, Vol.84,No.5, pp.772-93.

Carmichael, L. (1985) “Can Unemployment be Involuntary? Comment”. American Economic Review 75, No.5:1213-1214

Cotti, C. & Tefft, N. (2012). Fast Food Prices, Obesity and the Minimum Wage. Retrieved from http://www.bates.edu/economics/files/2012

Downes, A.S. et al (2000). Labour Market Regulation and Employment in the Caribbean. Inter-American Development Bank Research Working Paper #R-388 retrieved from http://athens.srs.uchicago.edu/jenni/iadb/ch11.pdf

Edagbami, O. (2006) The Employment Effects of the Minimum Wage: A Review of Literature.Canadian Policy Research Networks , retrieved from http://www.cprn.org/documents/42718_en.pdf

Gindling, T.H., & Terrell, K. (2011). The Impact of Minimum Wages on Wages, Work and Poverty in Nicaragua. Institute for the Study of Labour. Discussion Paper No. 5702

Grossberg, A.J., & Sicilian, P. (1999), “Minimum Wages on-the Job Training and Wage Growth”. Southern Economic Journal Vol. 65, No.3, pp. 539-56

Hall, R. (2003). Wage Determination and Employment Fluctuations. National Bureau of Economic Research. Retrieved from http://cowles.econ.yale.edu/lec-lun/2003/hall-030926.pdf

Hall, R. (1975) “The Rigidity of Wages and the Persistence of Unemployment”, Brookings Papers on Economic Activity , 2 :301-35

Hamermesh, D.S. and Biddle, J.E. (1994), “Beauty and the Labour Market”. The American Economic Review, Vol.84, No.5 pp. 1174-1194.

Hansen, L.P. (1982) “Large Sample Properties of Generalized Method of Moments Estimators”.Econometrica Vol.50, pp.1029-1054.

Jellal, M. & Zenou, Y. (1999) “Efficiency Wages and the Quality of Job Matching”. Journal of Economic Behaviour and Organization, Vol. 39, pp. 201-217.

Katz, L.F. & Krueger, A.B. (1992). The Effect of Minimum Wage on the Fast Food Industry. NBER Working Paper Series. Working Paper No. 3997, retrieved from http://www.nber.org/papers/w3997.pdf

Lazear, E.P. (1981) “Agency, Earnings Profiles, Productivity and Hours Restrictions”. American Economic Review 71:606-20

Leonard, T. (1999). The Very Idea of Applying Economics: The Modern Minimum Wage Controversy and its Antecedents. Retrieved from http://www.princeton.edu/~tleonard/papers/minimum_wage.pdf

Maloney, W.F., & Mendez, J.N. (2003). Measuring the Impact of Minimum Wages: Evidence from Latin America. Massachusetts: National Bureau of Economic Research.

Meer, J., & West, J. (2012). Effects of the Minimum Wage on Employment Dynamics. Retrieved from http://econweb.tamu.edu/jmeer/Meer_West_Minimum Wage.pdf

Neumark, D. & Wascher, W. (2006). Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research. National Bureau of Economic Research, Working Paper 12663. Retrieved from http://www.nber.org/papers/12663.pdf

Porter, N., Vitek, F. (2008). The Impact of Introducing a Minimum Wage on Business Cycle Volatility: A Structural Analysis for Hong Kong SAR. New York: International Monetary Fund WP/08/285.

Raff, M.G. & Summers, L.H. (1987). Did Henry Ford Pay Efficiency Wages? Retrieved from http://www.nber.org/papers/w2101.pdf?new_window=1

Ragacs, C. (2003). On The Empirics of Minimum Wages and Employment: Stylized Facts for The Austrian Industry. Working Paper No.24 retrieved from http://epub.wu.ac.at/596/1/documen.pdf

Rogerson, R., Shimer, R., & Wright, R. (2004). Search-Theoretic Models of the Labour Market: A Survey. National Bureau of Economic Research Working Paper Series. Working paper 10655.

Rosen, A. & Moen, E.R. (2006), “Equilibrium Incentive Contracts and Efficiency Wages”, Journal of the European Economic Association, 4(6): 1165-1192.

Ryska, P., & Prusa, J. (2012). Efficiency Wages and Involuntary Unemployment Revisited. Quarterly Journal of Austrian Economics.Vol.15 No.3: 277-303.

Schmitt, J. & Rosnick, D. (2011). The Wage and Employment of Minimum-Wage Laws in Three Cities, Centre for Economic & Policy Research, Washington, D.C.

Shapiro, C., & Stiglitz, J. (1984), “Equilibrium Unemployment as a Worker Discipline Device”. American Economic Review, 74, 433-444. _____________________.(1985) “Can Unemployment be Involuntary? A Reply”. The American Economic Review, Vol.75, No.5, pp.1215-1217.

Smith, H.B.L. (1907) “Economic Theory and Proposals for a Legal Minimum Wage”, Economic Journal, 17: 507-512

Solow, R.M. (1979) “Another Possible Source of Wage Stickiness”. Journal of Macroeconomics 1, 79-82

Wallis, G. (2002). The Effect of Skill Shortages on Unemployment and Real Wage Growth: A Simultaneous Equation Approach. Retrieved from http://eprints.ucl.ac.uk/18595/1/18595.pdf

Wilson, M. (2012). Negative Effects of Minimum Wage Laws. Policy Analysis. Retrieved from http://cato.org/pubs/pas/PA701.pdf

Yellen, J.L. (1984) “Efficiency Wage Models of Unemployment”. Information and Macroeconomics”, Vol.74, No. 2, pp. 200-205.