in the minimum wage would not lead to a violation of the fiscal rule from increases in public sector wages.<sup>30</sup> This is not the case for social protection spending linked to the minimum wage, such as the war veteran scheme. Any decisions on the adjustment of the minimum wage need to account for the budgetary implications of the war veteran scheme being based on the minimum wage.<sup>31</sup>

**The expected poverty impact is modest.** Using HBS data over the period 2012-2017, we perform Shapley decompositions to quantify the contributions to poverty reduction in recent years stemming from changes in labor income, as well as other factors, including demographics, changes in the share of employed working-age individuals, and changes in non-labor income. The results show that a 1 percentage point increase in the share of occupied adults (relative to the working age population) has been associated, on average, with a 1.39 percentage point reduction in the national poverty rate over the period 2012-2017. On the other hand, a 1 percent increase in average wages per employed adult has been associated with a 0.26 percentage point reduction in the poverty rate. We combine these estimates with our minimum wage simulations to quantify the potential contributions of the simulated changes in employment rates and labor earnings to poverty reduction. We assume that self-employment income does not change, so all increases in labor earnings are derived from higher earnings among salaried workers. These results imply that the lower employment rate and small increases in labor earnings (Table 3) can translate into a 0.1 percentage point increase in poverty in the short run, and a 0.3 percentage point increase in the long run.

# <mark>Sensitivity checks: Wage elasticity of labor demand</mark>

**<mark>Up to now, we have assumed a value of labor demand elasticity equal to -0.5 in the short run and -0.8 in the long run for skilled labor and -0.7 in the short run and -1 in the long run for unskilled labor.</mark>** <mark>According to Lichter and colleagues (2015), the vast majority of estimates of own-wage elasticity lies within the interval of -1 and 0. Therefore, we test how our estimates change depending on the calibrated value of elasticity. We consider three additional cases:</mark>

<mark>1. Low elastic labor demand: Elasticity -0.1 in the short run and -0.4 in the long run for skilled labor, and -0.3 in the short run and -0.6 in the long run for unskilled labor.</mark> <mark>2. High elastic labor demand. Elasticity -0.7 in the short run and -1 in the long run for skilled labor, and -0.9 in the short run and -1.2 in the long run for unskilled labor.</mark> <mark>3. Perfectly elastic labor demand, such that all potentially affected workers lose their jobs. This would provide an upper bound for employment losses due to the minimum wage increase.</mark>

**<mark>Can earnings losses due to job losses exceed the earnings gains from higher wages? When the wage elasticity is high, the net effect of an increase in minimum wage may be negative</mark>** <mark>. Table 5 reports the simulated labor market outcomes and net effect of the policy on earnings using different elasticity values. The net long-run effect of an increase in minimum wage on earnings can be negative if the wage elasticity is high (- 0.7 in the short run and -1 in the long run).  Column 6 (“Perfectly elastic labor demand”) reports the simulated labor market outcomes assuming that the labor demand is perfectly elastic and that all minimum wage workers would lose their jobs as a result of the minimum wage increase.  In this extreme case, the unemployment rate is simulated to increase by 4.2 percentage points and the youth unemployment rate by 7.1 percentage points.</mark>

> 30 Note that the underlying assumption is that higher wages are not affected by the policy.

> 31 An increase in the minimum wage to 250 euros/month is estimated to increase the annual cost of the war veteran scheme by approximately 36 million euros annually.

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