‘Disemployment’ effects of the minimum wage in the Colombian manufacturing sector

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The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.

AUTHOR OR EDITOR
Luis E. Arango
Sergio A. Rivera

The series Borradores de Economía (Working Papers on Economics) contributes to the dissemination and promotion of the work by researchers from the institution. On multiple occasions, these works have been the result of collaborative work with individuals from other national or international institutions. This series is indexed at Research Papers in Economics (RePEc)

Publication Date:
Wednesday, 18 March 2020

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

 

Abstract

 

In a labour demand approach, we present evidence of the effect that variations of the real minimum wage has on the formal employment of the industrial sector. The sample includes all industrial establishments of the Annual Manufacturing Survey between 2000 and 2015 that were always active during the whole period. We differentiate the workforce between skilled and unskilled by types of contracts (permanent and temporary). The real wage paid to workers by plants is divided into two components: one linked to the minimum wage and other that mirrors the plants’ own-policy remuneration. The labour demand functions, conditional and unconditional, that we estimate are consistent with the theory and the previous literature. The evidence suggests that increases of the real minimum wage destroy employment fundamentally of unskilled labour, both permanent and temporary mainly in plants with less than 100 workers dedicated to production. The long-term elasticities of labour demand to the real minimum wage that we estimate in multiple specifications are between -0.615 and -0.715. Thus, an increase of 1 percent of the minimum wage reduces, ceteris paribus, labour demand about 0.7 percent within a period between one and two years. The real wage elasticity is between -0.358 and -0.718 while the sizeable output elasticity, about 1.6, suggests a high cyclicality of labour demand.