# **IV. Ex-ante Evaluation of Policy Reform**

This section assesses the potential ex-ante distributional effects of the alternative minimum wage policy using micro-simulation techniques. Specifically, we simulate the percentage of job-losers and wage increase for those who remain employed to estimate economy-wide and micro-level distributional effects of the policy.

## Methodology

**In this paper we use own-wage labor demand elasticities from international studies to simulate employment and wage changes as a result of changes in minimum wage.** We measure the disemployment effect as the fraction of workers with wages between the current and the proposed minimum wage moving to unemployment with zero wages (losers). We also look at those who remain employed and earn the new minimum wage (winners). Note that we assume only employees who earn between the current and the proposed minimum wage could be affected by the policy, given that the self-employed are not covered by the minimum wage legislation. We focus on minimum wage effects at the lower end of the wage distribution, and do not account for the possibility that higher-wage workers might be affected by the policy because this effect is difficult to measure given data availability. For instance, employers may increase the demand for high-skilled workers (substituting low for high-skilled labor). Also, an increase in the minimum wage could place an upward pressure on some wages that are indexed or linked to the minimum wage, especially in the public sector. Finally, we only consider movement along the labor demand curve (under different elasticities), but not shifts of the demand curve.<sup>25</sup> These effects could have further implications for employment, unemployment, and productivity.

**We assume short- and long-run elasticities using results for Eastern Europe from a meta-analysis provided in Lichter, Peichl and Siegloch (2013).** We consider different elasticities for different skill levels, as well as short- and long-term elasticities.  This takes into account that employment is more sensitive to minimum wages among unskilled workers and to larger elasticities in the long run than in the short run because employers can fully adjust either in the intensive or extensive margin.  In our baseline specification, we use the elasticity values presented in Table 2.<sup>26</sup> The interpretation of the baseline elasticity value is the following: if wages of affected skilled workers increase on average by x percent, x*0.5 percent of affected skilled workers would lose their jobs in the short run and x*0.8 percent in the long run .

**To the best of our knowledge, prior research has not estimated labor demand elasticity for Kosovo, which in turn can vary substantially from the estimated elasticities for Eastern Europe.** To address this issue, we test the sensitivity of our results to the choice of the elasticity values in the next subsection.

The micro-simulation algorithm is as follows:

1. Estimate an expected wage increase (in percentage) for each group defined _by age, education, occupation, gender and skill level_ .

> 25 <mark>Some of the negative employment effects that result from wage increases (which are cost increases) may be due to more firms closing rather than firms laying off workers, especially in the long run. Analyzing change in the distribution of firms is difficult given the lack of firm-level data. Further firm-level analysis is required to take this effect into account.</mark>

> 26 The earliest studies of the employment effects of minimum wages used only national variation in the U.S. minimum wage. They found elasticities between -0.1 and -0.3 for teens aged 16-19, and between -0.1 and -0.2 for young adults aged 16-24. Other analyses that attempt to make valid geographic comparisons estimate employment responses from as low as 0 to as high as -0.50 (Newman, 2015).

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