When the minimum wage really bites hard: The negative spillover effect on high-skilled workers

Keywords Minimum wages; Wage effects; Spillover effects; Returns to skills; Unconditional quantile regression; Scale effect; Substitution effect; Skill supply; Labor-labor substitution Highlights * We study the effect of a minimum wage that was set relatively high during an economic downturn. * We find wage increases for low-wage workers that ripple out to workers beyond the median wage. * The minimum wage reduced real wages for better-paid workers, returns to skills and skill supply. * Negative spillovers result from negative scale effects that exceed positive substitution effects. Abstract Minimum wage levels are rising around the globe. To shed more light on the possible unintended side effects of higher wage floors, we study the impact of a minimum wage introduction on wages and employment in a quasi-experimental setting where the minimum wage is set extraordinarily high during an economic downturn. We identify treatment effects along different wage and skill groups and find positive wage and employment spillover effects for medium-skilled workers with salaries just above the minimum wage. More striking, we find negative wage and employment effects for high-skilled workers who are further up the wage distribution, followed by reduced returns to skills and industry skill supply. We explain these adjustments with a substitution-scale model that predicts negative spillover effects whenever labor-labor substitutions toward high-skilled workers are overcompensated by an overall decline in industry employment. Even though we focus on a specialized industry, we lay out the general conditions under which such unfavorable adjustments may occur in other contexts. Author Affiliation: (a) Institute of Labor Economics (IZA), Bonn, Germany (b) ZEW -- Leibniz Centre for European Economic Research, Mannheim, Germany (c) Utrecht University, the Netherlands (d) CESifo Research Network Affiliate, Germany Article History: Received 24 May 2021; Revised 15 November 2021; Accepted 15 December 2021 (footnote)[white star] We thank Jeffrey Clemens, three anonymous referees, Melanie Arntz, Stephan Dlugosz, Bernd Fitzenberger, Heinrich Kögel, Michael Maier, Joachim Möller, David Neumark, and Anna Salomons as well as participants of the seminars at Utrecht University, ZEW Mannheim, University of Regensburg, DIW-Conference on the 'Evaluation of Minimum Wages,' and the annual congresses of the Society of Labor Economists (SOLE), European Economic Association (EEA), and German Economic Association (VfS) for helpful comments and suggestions. We further thank the Central Pay Office (LAK) of the roofing industry for providing us with hourly wage data. Our paper was partly financed by the ZEW Sponsors' Association for Science and Practice, and by the state of Baden-Württemberg within the SEEK program, and it profited from a preceding evaluation of minimum wage effects in the German roofing industry that was financed by the German Federal Ministry of Labor and Social Affairs (BMAS). The results and conclusions derived in this study do not necessarily reflect the views of the BMAS. This paper builds on an earlier version, 'When the Minimum Wage Bites Back: Quantile Treatment Effects of a Sectoral Minimum Wage in Germany,' ZEW Discussion Paper No. 14-133. Byline: Terry Gregory [gregory@iza.org] (a,b), Ulrich Zierahn [u.t.zierahn@uu.nl] (b,c,d)