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The effects of minimum wage increases on labor demand growth


Arango Thomas, Luis Eduardo

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Universidad del Rosario


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This work discusses the effects of the minimum wage on Colombian Manufacturing labor using the estimation of conditional and unconditional labor demand models, as well as the panel structure of the Colombian Annual Manufacturing Survey (AMS). Findings show significant long-run minimum wage elasticities in labor demand: 0.638, -0.774, and -0.6 for skilled, unskilled, and total workers, respectively; meaning that minimum wage pressures the substitution of unskilled for skilled workers. The substitution effect, however, is not enough to prevent a negative reaction on aggregate labor demand due to the predominantly unskilled composition of the manufacturing workforce. The minimum wage negative effect on labor demand is especially sizable for unskilled temporary workers. The largest employment generating sectors are more sensitive to minimum wage and own price variations revealing the presence of heterogeneity within the manufacturing. Additionally, a positive TFP elasticity of labor demand is found in the unconditional labor demand model but it is not statistically significant implying the link between TFP and labor demand could potentially be affected by the increased prevalence of temporary contracts among workers.
Palabras clave
Labor demand , Minimum wage , Manufacturing , Employment determinants , TFP
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