IMF Working Papers

Most European countries have a single national minimum wage. An increase in minimum wage implies shocks of different magnitudes to sectors and subnational regions. Using sectoral and regional variations of minimum wage to average wage ratios in European countries, we estimate the dynamic and heterogeneous treatment effects of minimum wage changes on employment through local projections and generalized random forests. We find that the average employment effects of minimum wage increases tend to be negligible in the short term but negative in the medium to long term. The employment effects are heterogeneous in gender, age, the size of the minimum wage increase, and the minimum wage to average wage ratio. Minimum wage increases appear to have a threshold effect on employment at the sectoral level. The employment effects become negative when the minimum wage is above 35 percent of the sectoral average wage.