What Is the Impact of a Binding Minimum Wage on the Agricultural Sector?

Abstract

What is the impact of a binding minimum wage on the agricultural sector? We find that labour productivity growth matters for the agricultural sector. The results suggest that the agricultural sector output growth, the minimum wage and employment growth increase in response to positive shocks to labour productivity growth. The increases in labour productivity growth are transmitted via an increase in output growth, wages and employment growth. This implies that the agricultural sector conforms to the wage efficiency hypothesis. In addition, evidence shows that positive minimum wage shocks result in an increase in the capital-labour ratio. The results show that farmers not only increase hours worked in response to an increase in the binding minimum wage, but they also increase the rate at which the capital replaces labour in the production process. This is why there is no decline in output growth. Hours-worked and the introduction of labour-reducing practices explain the adjustment through which the agricultural sector adjusts to a binding minimum wage shock in line with the predictions of the institutional model. Positive minimum wage shocks exert similar effects as those of a food commodity price bust and monetary policy tightening on employment growth.