Effects of Minimum Wages on Labor Markets and the Overall Economy: A bird's-eye view on Japanese and overseas research

Author Name TSURU Kotaro  (Faculty Fellow, RIETI)
Creation Date/NO. March 2013 13-J-008
Research Project Reform of Labor Market Institutions
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This paper surveys theoretical and empirical research on the effects of minimum wages in Japan and overseas and provides some implication for Japan's minimum wage policy.

The debate over the minimum wage policy is often judged by its disemployment effect. In Japan, literature employing large panel data and focusing on those directly affected by minimum wages have unambiguously found the negative effects of minimum wages on employment. Policymakers need to bear a tradeoff in which some people receive higher wages while others suffer job losses. In addition, the impact on income distribution, working hours, profits, prices, and human capital as well as employment and evaluating their overall impact should be analyzed in a more comprehensive manner.

Our policy recommendations are as follows. First, excessive burden on particular groups in the case of minimum wage increases must be avoided. One way is to introduce a lower level of minimum wage for teens as adopted in European countries. Second, increases in minimum wages, if any, should be moderate. Third, improved treatment of low-wage workers needs to be done via enhanced labor-management relations rather than by minimum wage increases. Finally, professional organizations such as the Low Pay Commission (LPC) in the United Kingdom that recommends minimum wage policies based on empirical evidence should be created.