Minimum wage and local employment: A spatial panel approach

This study analyzes spatial dependencies in the relationship between employment and minimum wage. Local employment may be affected not only by changes relative minimum wage in a region but also by those in neighboring regions. We use the spatial Durbin model and data for 380 local Polish labor markets during 2006–2018. The results reveal significant heterogeneities in the model, showing a significant spatial relationship between local employment and the minimum-to-average-wage ratio in neighboring regions. Local minimum wage effects, insignificant at the beginning of the analyzed period, become significant and negative. These results may not be observed without a spatial model framework and are important for minimum-wage policymakers. Our results suggest that, in countries with strong differences in average wage level between regions, the minimum wage can be differentiated at the local labor market level to avoid large differences in the minimum-to-average-wage ratio.