The Impact of Introducing a Minimum Wage on Business Cycle Volatility: A Structural Analysis for Hong Kong SAR

 
Author/Editor: Porter, Nathaniel John ; Vitek, Francis
 
Publication Date: December 01, 2008
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: We study the impact of a minimum wage on business cycle volatility, depending upon its coverage and adjustment mechanism. As with other small open economies, Hong Kong SAR is vulnerable to external shocks, with its exchange rate regime precluding active monetary policy. Adjustment to past shocks has relied on flexible domestic prices. We find that a minimum wage affecting 20 percent of employees would amplify output volatility by 0.2 percent to 9.2 percent, and employment volatility by ?1.2 percent to 7.8 percent. A fixed wage or indexation to consumption price inflation increases volatility most. Indexation to wage inflation or unit labor cost growth is preferable, largely preserving labor market flexibility.
 
Series: Working Paper No. 08/285
Subject(s): Minimum wage | Hong Kong Special Administrative Region of China | Business cycles | External shocks | Exchange rate regimes | Monetary policy | Inflation | Wage indexation | Labor market policy | Economic models

Author's Keyword(s): Minimum wage | indexation mechanism | business cycle volatility | dynamic stochastic general equilibrium model | unobserved components model | market flexibility | small open economy
 
English
Publication Date: December 01, 2008
Format: Paper
Stock No: WPIEA2008285 Pages: 54
Price:
US$18.00 (Academic Rate:
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