The effect of minimum wage on youth employment and unemployment in Taiwan

Using Taiwan's quarterly time series data from 1973 to 2004, this paper investigates the effect of minimum wage on youth employment and unemployment. The effect of minimum wage is examined under data from 30 industries and after controlling for demand-side and supply-side factors in the analysis, the estimation results show that a 10% jump in the minimum wage would increase the youth employment rate and the youth labor participation rate by 0.47%, although no significant effect was found for the youth unemployment rate. Our results are consistent with (though the magnitude is small) the findings of the New Economics of the Minimum Wage. However, we find that the positive employment effect of minimum wage is not driven by the decrease in youth unemployment, but rather mainly from the increase in the participation rate by youths. Therefore, the policy implication derived from Taiwan's empirical study suggests that in the short run the minimum wage has no adverse effect on youth employment, however, the long-run effect of the minimum wage on youths may be large and harmful as the increasing early dropout of them from school into the labor market interrupts the accumulation of human capital and thus deters the long-run economic growth of the economy.