Does the employment effect of national minimum wage vary by non-employment rate? A regression discontinuity approach

Abstract

We extend the Regression Discontinuity model to evaluate the procyclicality of employment effect of minimum wage and show that previous estimates may be biased due to failure to account for the local non-employment rate. The results suggest that the positive employment effect of increasing minimum wage is strongly procyclical, that is, is more pronounced in areas with low non-employment rates. Under an assumption that employers have no direct impact around the cut-off point, the results suggest that a higher minimum wage increases labour supply of young workers.