Employment effects of minimum wages in a dual economy: Evidence from Thailand

Abstract

This study employs both theoretical insights and empirical techniques to investigate the impact of a minimum wage increase on employment when minimum wage coverage is incomplete. Previous empirical studies on this topic have found conflicting results: while some find the share of the covered sector decreases, some find it increases. In the theoretical part, we extended the classic two-sector model and found both scenarios can occur depending on the parameters of the economy. Empirically, using as a natural experiment a novel minimum wage policy in Thailand whereby 40 percent of workers were not covered by the legislation, we found that one percent increase in the minimum wage reduced low-skilled employment in the covered sector by 0.1–1.1 percent and increased employment in the uncovered sector. The official unemployment rate also decreased because the rise in the minimum wage lowered the probability of covered employment to such a large extent that workers instead turned to the uncovered sector.