Young employment, job-skill composition and minimum wages: evidence from a “natural experiment"

Abstract

Empirically very little is known about the impact of an increase in the minimum wage of young workers on the job-skill composition. This is an important question because small (or zero) effects on teenage employment may mask a substitution of more for less-skilled teenagers. Therefore, the estimation of the elasticity of substitution between skilled and unskilled workers is required. This paper will consider the increase in the minimum wage of young workers that took place in Portugal on the 1st January, 1987. This change is of particular interest, not only because it was so large (33% in real terms) and affected a significant share of workers under 20 years old (about 20%), but also because it motivated a decrease in the wage premium earned by young skilled workers from 1.24 to 1.20. The results are consistent with the view that the minimum wage increase had some negative impact on employment of unskilled workers, the most affected group: an increase of 1% in wage induced by the increase in minimum wage reduces employment of this group of workers between 0.42% to 0.47%. Nevertheless, this negative impact was partially compensated by the substitution of more for less-skilled teenagers, because there is some evidence that the elasticity of substitution between young workers with different skills is different from zero.