Minimum Wage Effects on Industry Specialization: An Empirical Investigation of 17 European Countries

Abstract: Minimum wage laws are an intensely debated topic within politics, as within academics. Previously, neoclassical minimum wage research had reached an apparent consensus that minimum wages will increase unemployment, especially of the unskilled and youth. This insight, however, has been fiercely challenged and today no academic consensus regarding minimum wage effects exists. In theory, the minimum wage can have positive, as well as negative consequences on welfare, ultimately which are larger is an empirical question. We contribute to the body of empirical minimum wage research by testing minimum wage effects on industry specialization, suggesting that high minimum wages can increase a countries specialization in high skilled industries. We have constructed a dataset covering 17 European countries and 52 industries and investigate a 10-year time period from 1993-2002. Our results show that the direction of the minimum wage’s effect on industry specialization is as expected, although this effect is only statistically significant at the 10 percent level. Therefore, we conclude that there is a statistical dependence of the patterns of industry specialization on the minimum wage. However, the unreliability of our results raises doubts on whether the minimum wage can be used as a policy tool to alter a nation’s structure of industry specialization.