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Are Firms Willing to Pay Lower Wages? A Quasi-Experiment on Subminimum Wage Policy

Author

Listed:
  • Petri Böckerman

    (University of Jyväskylä, Labour Institute for Economic Research LABORE, and IZA Institute of Labor Economics)

  • Toni Juuti

    (Labour Institute for Economic Research LABORE and Tampere University)

  • Tuomas Kosonen

    (VATT Institute for Economic Research and Finnish Centre of Excellence in Tax Systems Research FIT)

  • Henri Keränen

    (VATT Institute for Economic Research)

Abstract

We examine a subminimum wage policy in the Finnish retail trade sector during 1993–1998 that allowed firms to pay subminimum wages to newly hired workers under the age of 25. This quasiexperiment enables us to compare wages for new hires in retail trade with those in similar industries. Despite the ongoing recession, the policy was adopted by firms sparingly, with most eligible workers being hired at the standard minimum wage. We propose that wage norm at the standard minimum wage creating indirect costs for firms paying subminimum wage would be the mechanism why the take-up of subminimum wage by firms remained low. We provide empirical evidence supporting this mechanism, most notably the excess mass at the standard minimum wage in the wage distribution of eligible workers. Many firms that paid the subminimum wage also reverted back to paying the standard minimum wages for subsequent hires.

Suggested Citation

  • Petri Böckerman & Toni Juuti & Tuomas Kosonen & Henri Keränen, 2024. "Are Firms Willing to Pay Lower Wages? A Quasi-Experiment on Subminimum Wage Policy," Working Papers 29, Finnish Centre of Excellence in Tax Systems Research.
    • Handle: RePEc:fit:wpaper:29
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    References listed on IDEAS

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    More about this item

    Keywords

    Minimum wages; subminimum wage; wage determination; fairness; employment; firms;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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