Closing the gap

This paper examines the dynamic effect of minimum wage policy on employment and unemployment using multivariate time series techniques. The particular minimum wage policy being considered occurred in Puerto Rico in 1974 when it was decided to close the minimum wage gap between the island and the United States incrementally by 1980. Multivariate transfer functions are specified with the intent of distinguishing between minimum wage policy effects and structural changes brought about by the post-1974 recessions. The results suggest that minimum wage policy gave rise to more significant unemployment than disemployment effects. The pattern of labor mobility supports that suggested by the development literature in which labor flows from uncovered to covered sectors. However, given the structure of welfare programs on the island, it is likely that flows from the covered to the non-market sector also took place.