Effects of minimum wages on total employment where the legislative coverage is limited: Evidence from Cyprus time series data

Empirical labour market studies on the effects of minimum wages are typically confined to the sector or the worker group directly affected. Also, they often address the cases where the legislative coverage of the minimum wage is universal or almost universal. This study examines the relationship of the total employment with the minimum wage in the special case where only a number of occupations are covered by the relative legislation. A theoretical background is provided by a recently developed search and matching model and empirical evidence is provided by analysing time series data from Cyprus, one of the few countries in the world, and the only country in the European Union, where the minimum wage coverage is limited to only a small number of occupations. The analysis is done by carefully addressing the issues of stationarity, dynamic specification and endogeneity that most of the existing literature ignores. In order to ensure the estimated results are valid, the stability of the series is examined, using unit root tests under exogenous and endogenous structural breaks. Evidence is found of a significant and negative relationship between the minimum wage and total employment, despite the limited coverage of the minimum wage legislation. This suggests the existence of significant spillover effects to the occupations that are not covered by the minimum wage legislation.