Estimating the effects of the minimum wage in a developing country: A density discontinuity design approach

Abstract

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Identification and Estimation Using a Density Discontinuity Approach

“…The typical setting in the density discontinuity approach involves (i) a continuity assumption on the latent distribution, similar to the assumption of the smooth conditional expectation of potential outcomes in the standard RDD setting; (ii) the absence of spillovers, which restricts the responses of individuals to just one side of the threshold; and (iii) an effect structure assumption, which describes the behavior of the individuals on the affected side of the threshold. Different forms of this assumption have been invoked in the literature to capture extensive-margin responses (Doyle, 2007;Jales, 2015), intensive-margin responses (Bajari, Hong, Park, and Town, 2011), and heterogeneity in bunching probabilities (Kleven and Waseem, 2013). This survey is not exhaustive.…”

“…We will review papers covering the fields of health, public, and labor economics. We discuss the analysis of the elasticity of earnings with respect to taxes conducted by Kleven and Waseem (2013), the response of hospitals to reimbursement structure as analyzed by Bajari, Hong, Park, and Town (2011), and the effects of the minimum wage on wages and employment studied by Doyle (2007) and Jales (2015). Despite the apparent dissimilarities across these topics, the identification arguments used in these papers are inherently connected.…”

“…Firm size distributions exhibit similar behavior when companies are subject to discontinuous changes in tax liability at certain employment thresholds (Garicano, Lelarge, and Van Reenen, 2013). Imperfectly enforced price controls, such as the minimum wage, generate a similar pattern in the wage distribution (Meyer and Wise, 1983;Doyle, 2007;Jales, 2015). Hospitals' levels of spending present discontinuities when reimbursement schedules are non-linear functions of spending (Bajari, Hong, Park, and Town, 2011;Einav, Finkelstein, and Schrimpf, 2016).…”

“…Kleven and Waseem (2013) assumed that the density of earnings would be continuous under a baseline linear tax system. Doyle (2007) and Jales (2015) assumed that the wage density would be continuous in the absence of a minimum wage. Bajari, Hong, Park, and Town (2011) assumed that the density of health care expenditures would be continuous in the absence of discrete changes in the reimbursement rate.…”

“…The equations are given by: Doyle (2007) and Jales (2015) found statistically significant disemployment effects of the minimum wage in the U.S. and Brazil, respectively. Jales (2015) also found that the relative size of the informal sector in Brazil grows substantially, from approximately 20% to 27% of the economy.…”