Minimum-Wage and Probability-Of-Getting-A-Job Effects in a Simultaneous Equations Model of Employment and Participation: Canada 1975-1991

Abstract

There is an extensive literature about the effect of an effective minimum wage on employment, and some literature on its effect on labour force participation. The contribution of this paper to the literature is three fold. First, while previous research estimated these effects separately, this paper estimates them within a simultaneous equations model. Demand and supply equations are formulated for competitive labour markets, and these structural equations are estimated simultaneously. Second, the probability of getting a job is introduced into the labour supply equation, and its effect on labour force participation is estimated. This follows Mincer (1976), who suggests that by ignoring it, the traditional analysis of minimum wage effects is deficient; the variable may be an important determinant of labour supply whenever there is excess supply in labour markets, and this is the case when the minimum wage is effective. This probability is likely to change as a result of a change in the effective minimum wage, affecting, in turn, labour force participation (at a given minimum wage). Third, most of the literature studies minimum wage effects on low wage groups, e.g. youth. However, economic theory suggests that labour substitutions (and spill-over effects) may affect the wages and labour demands and supplies of other groups. The paper follows studies like Schaafsma and Walsh (1983), and estimates the minimum-wage effect on several sex-age groups. The theoretical model is summarized in the next section. The third section discusses the statistical model and the variables. The fourth section deals with the data and the estimation procedures. The empirical results are summarized and discussed in the last section.