The impact of the national minimum wage on employment in Malta

Abstract

This dissertation analysis the relationship between the effect of changes in the national minimum-wage on labour demand, measured by the aggregate hired employment, using data pertaining to Malta. This relationship is estimated by the Least Squares method of regression utilising a labour demand equation, which expresses aggregate hired employment as a function of the average wage rate, GDP, and other variables. The data utilised relates to 1956- 2011. The findings of the labour demand model indicate that employment is influenced by changes in GDP and by wage rates, as expected. A partial adjustment scheme was introduced to distinguish between short-run and long-run effects. The labour demand model was also specified in disequilibrium form to allow for the possibility that labour demand is not observed when there is excess demand for labour. The study also finds that there is a positive relationship between the average wage rate and the minimum-wage rate, with a lag on one year. This implies that employment is negatively related to the minimum-wage, via the latter's effect on the average wage rate. The study concludes that, as expected, the elasticity of wage rates with respect to labour demand is higher in the long-run than in the short-run. The estimated elasticities of the minimum-wage rate on hired employment are 0.2 in the short run and 0.3 in the vi long run, implying that a 1% increase in the minimum-wage is likely to reduce hired employment by 0.2% or 0.3% in the following year, everything else remaining constant. It should be kept in mind however, that in any one year the effect of the increase in GDP more-than compensates for this negative impact of the minimum-wage rate.