The Effect of Minimum Wage on Youth Employment and Unemployment in Taiwan

Abstract

Using Taiwan’s quarterly time series data from 1973 to 2004, this paper investigates the\r\neffect of minimum wage on youth employment and unemployment. The effect of minimum\r\nwage is examined under data from 30 industries and after controlling for demand-side and\r\nsupply-side factors in the analysis, the estimation results show that a 10% jump in the\r\nminimum wage would increase the youth employment rate and the youth labor participation\r\nrate by 0.47 %, although no significant effect was found for the youth unemployment rate. Our\r\nresults are consistent with (though the magnitude is small) the findings of the New Economics\r\nof the Minimum Wage. However, we find that the positive employment effect of minimum\r\nwage is not driven by the decrease in youth unemployment, but rather mainly from the\r\nincrease in the participation rate by youths. Therefore, the policy implication derived from\r\nTaiwan’s empirical study suggests that in the short run the minimum wage has no adverse\r\neffect on youth employment, however, the long-run effect of the minimum wage on youths may be large and harmful as the increasing early dropout of them from school into the labor market interrupts the accumulation of human capital and thus deters the long-run economic growth of the economy.