This article, “Minimum wages and youth employment: Evidence the Finnish retail trade sector” is proving that in Finland, in the 90s, letting employers the possibility to pay less young people had practically no effect. It has been written by Petri Böckerman for the Labour Institute for Economic Research, and Roope Uusitalo for the Labour Institute for Economic Research and the Institute for Labour Market Policy Evaluation.

Abstract

Following an agreement between the trade unions and the employer organisations,
Finnish employers could pay less than the existing minimum wage for young workers
between 1993 and 1995. We examine the effects of these minimum wage exceptions
by comparing the changes in wages and employment of the groups whose minimum
wages were reduced with simultaneous changes among slightly older workers for
whom the minimum wage regulation was still binding. Our analysis is based on the
payroll record data and minimum wage agreements from the retail trade sector over
the period 1990-2005. We discover that average wages in the eligible group declined
only modestly despite the fact that the excess supply of labour during high
unemployment should make it relatively easy to attract workers even with low wages.
The minimum wage exceptions had no positive effects on employment.

1. Introduction
The negative employment effects of minimum wages were taken granted for decades
(e.g. Stigler 1946; Brown et al. 1982). Only in the 1990s was this consensus view
challenged. In their influential book Card and Krueger (1995) argued that the existing
evidence of the minimum wage effects was questionable. They showed that minimum
wage increases often had no negative employment effects and sometimes the effects
were positive. Considerable debate about the relevance of the new view remains,
however (Neumark and Wascher 2006). The effects of minimum wages on youth
employment are subject to a similar controversy. Some studies find large negative
employment effects due to the increases in minimum wages (e.g. Abowd et al. 2000;
Pereira 2003), while other studies report considerable positive effects (e.g. Portugal
and Cardoso 2006; Hyslop and Stillman 2007).
This paper evaluates the effects of minimum wages on youth wages and employment
in Finland. The empirical analysis is based on a union agreement that allowed
employers to pay less than the minimum wage to workers who were below 25 years
of age and had at most one year’s work experience. Hence, in contrast to many recent
studies that have considered the effects of increases in minimum wages the Finnish
policy involved a temporary decrease in the minimum wage. This subminimum youth
wage policy was effective between 1993 and 1995 at the time of severe recession in
the Finnish economy. The policy intended to boost employment among the groups
that were most likely to be affected by high minimum wages. In this paper, we
analyse the effects of the policy by comparing the changes in wages and employment
of the group whose minimum wages were reduced with simultaneous changes among
slightly older workers for whom the minimum wage regulation was still binding.
We focus on the retail trade sector, because it is a low-wage industry, where one
could expect to discover negative employment effects stemming from minimum
wages. Moreover, the turnover of the workforce is high and part-time work is very
common, which could help firms to achieve desired changes in employment quickly
(Brown 1999).
Finland does not have statutory minimum wage laws. Instead, minimum wages are
determined in the contracts between the unions and the employer organisations.1
3
These contracts are extended to all workers in the sector and are therefore also
binding for non-union workers. Owing to the extension of union-bargained minimum
wages to all workers the employment effects of the minimum wage contracts could be
quite similar to the effects of statutory minimum wage laws. An interesting difference
is that the union contracts do not specify a single minimum wage but a set of taskspecific
minimum wages. The minimum provisions vary across regions and the
contracts contain clauses on how minimum wages depend on seniority. In this sense,
the Finnish minimum wage system closely resembles the Swedish and Norwegian
systems (Askildsen et al. 2000; Skedinger 2006). Union bargaining over minimum
wages is not uncommon elsewhere either. For example, those seven EU countries that
do not have statutory minimum wages have all established a tradition of minimum
wages set by collective bargaining, often at the sectoral level. Even in countries with
statutory minimum wages the social partners may have a direct or a consultative role
in minimum wage adjustments (Eurofound 2007).
The evidence on the effects of union-negotiated minimum wages is sparse. Only one
out of 86 studies that are cited by Neumark and Wascher (2006) considers the effects
in the system with negotiated minimum wages. Skedinger (2007) argues that the
union-bargained minimum wage system is interesting, because the negative effects of
minimum wages can be larger or smaller, compared with the countries with statutory
minimum wage legislation, depending on how well the unions are able to assess what
a relevant market-clearing wage for unskilled workers is. The variation in the
minimum wage across workers and the changes in the minimum wage that affect only
some workers also help in studying the effects of the minimum wages. Skedinger
(2006) uses this strategy and finds that the increases in the minimum wages have had
significant negative effects on employment in Sweden.2
Our analysis is based on the payroll record data and minimum wage agreements for
the period 1990-2005. To preview the results, we show that the minimum wages
fundamentally shape wage distribution in the Finnish retail trade sector. There is a
clear spike in wage distribution at the minimum rate and missing mass below that
point. Still, we find that relaxing the minimum wage regulation for young workers
had only a minimal impact on the actual wages. We find no positive employment
effects.

The paper proceeds as follows. Section 2 describes the institutions and the structure of
negotiated minimum wages. Section 3 explains the minimum wage exceptions for
young workers during 1993-1995. Section 4 introduces the data. Section 5 contains
our analyses. Section 6 concludes.

The full article on the website of the Finnish Labour Institute for Economic Research