RDP 2018-06: The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss 5. Empirical Strategy

I focus on jobs paid exactly an award wage prior to each FWC decision. I do this to obtain direct estimates of the effects on the population of interest (award-wage earners) and because I can only infer the relevant award wage adjustment for this group. As discussed earlier, this approach differs from most of the previous literature, which tends to focus on groups that are likely to be most affected by minimum wages changes, such as restaurant staff and youths.

I use a difference-in-differences (DD) model to estimate the effects of award wage changes on wages, hours worked and the job destruction rate. The size of the ‘treatment’ in this model is governed by a continuous variable that measures the percentage change in wages that an award-reliant employee should receive, given their wage level immediately prior to the decision. This DD model simply compares the change in each outcome variable – wages, hours worked or job destruction – around each FWC decision between jobs that experienced a relatively large percentage increase in their award wage and those that experienced a relatively small increase.

Rather than consider the 11 decisions between 1998 and 2008 individually, I pool them together and use a single DD estimator that constrains the coefficient of interest to be constant across the decisions. This maximises the available sample that I have to estimate the elasticities of interest. The DD equation is,

where y_ikt is the dependent variable of interest for job i in wage group k at time t.^[8] λ_t is a full set of time dummies that control for any macro shocks that affect all wage groups in any of the 22 time periods (there are 11 different FWC decisions each with their own ‘before’ and ‘after’ period). FWC_k is the log change in award wages for wage group k due to the FWC decision. There are also a set of interactions between FWC_k and d_t, the latter being a dummy that takes the value of zero in the ‘before’ period immediately prior to an award increase and a value of one in the ‘after’ period six months later. The coefficient of interest is β₃. When the dependent variable is the log hourly wage (or log hours worked), this DD coefficient is the elasticity of wages (or hours) with respect to the award wage, a parameter of key interest to policymakers.

In addition to constraining the DD coefficient to be constant across each of the FWC decisions, Equation (1) also restricts the effects of group-specific heterogeneity (as captured by FWC_k) to be constant across each decision. Relaxing this assumption, and allowing for a more flexible control for the group-specific heterogeneity, has very little impact on the results (see Section 8.1).

Footnote

A wage group is defined as any job paid a certain wage. For example, all jobs paid $20 per hour will be one group. [8]