Revisiting the Employment Effects of Minimum Wages in Europe

Abstract

In a cross-country setup of European countries, we find a significant nonlinear relationship between the minimum wages and employment rate of young individuals. Theoretically, while low minimum wages can indeed be positively associated with employment, after a certain level of the minimum wage, the relationship turns negative. This implies that there is an optimal level of minimum wages that maximizes the employment rate of young individuals. We additionally show that the negative relationship between minimum wages and employment of young workers is stronger if labor markets are otherwise strictly regulated and when workers are relatively unproductive. Using these results, we are able to calculate country-specific turning points and show that some European countries in our sample might in fact contribute to high unemployment rates among young individuals by setting minimum wages too high. However, in other European countries, especially the Eastern European countries, an increase in minimum wages (up to a certain level) might even lead to higher employment rates of young individuals.