- **b. By sector (private and public) and educational levels**

<!-- Start of picture text --> 500 449<br>403 407<br>400<br>299<br>277 279<br>300<br>200<br>100<br>0<br>Primary or less Secondary Post-secondary<br>Public Private<br>2015 Euros<br><!-- End of picture text --> _Source: Own estimates using the 2012-2018 Kosovo LFS. Nominal wages deflated with official CPI estimates from Kosovo Statistics Agency (Harmonized Indices of Consumer Prices; 2018)._

**To summarize, Kosovo’s labor market is characterized by high unemployment and informality rates, which must be taken into consideration for minimum wage policy design** . First, high unemployment rates could suggest high elasticity of labor demand, which may result in substantial job loss due to an increase in the minimum wage. Second, workers earning the minimum wage were on average younger, less educated, and employed in non-professional occupations. Given the high concentration of low skilled workers among minimum wage workers in Kosovo and given empirical evidence that labor demand elasticity was higher for low-skill occupations <mark>(Lichter, Peichl and Siegloch [2015] among others</mark> ), employment loss could be significant. However, even assuming no adverse effects of the policy (i.e., no job losses), because the employment rate was low (28.8 percent) and only about 8-9 percent of workers would be potentially affected by the policy assuming the baseline scenario (an increase to 250 euros), only 2.3-2.6 percent of the total population would gain from the minimum wage policy. When considering alternative minimum wage policies (see Table 1), the potential share of affected workers varies from 0.2 percent (Scenario 4: a rule based minimum wage accounting for core inflation and private sector wage growth) to 5.6 percent (Scenario 2: an increase to 230 euros). Therefore, the poverty reducing effect of the minimum wage increase is expected to be modest in all considered scenarios and potentially adverse and thus should be viewed more as a tool to reduce wage inequality.  In Section IV, we provide a comprehensive ex-ante policy evaluation using a micro-simulation technique.

# **III. Distributional Implications**

**In the first section we discussed three main potential effects caused by a minimum wage increase assuming the baseline scenario (an increase to 250 euros). In this paper, we focus on disemployment and distributional effects, rather than compositional effects.** The disemployment effect of the minimum wage might stem from employers moving away from the now more expensive labor and towards other inputs. Also, as a result of higher costs of labor, product prices rise, which further reduces consumption and, consequently, labor demand.<sup>19</sup> Economic theory suggests that low-skilled workers can be substituted more

> 19 An increase in goods prices due to the minimum wage might also directly reduce the policy’s effect on poverty reduction. In fact, <mark>MaCurdy (2015) found that an increase in prices due to the minimum wage policy was higher for those goods that made up a larger fraction of consumption for the poor.</mark> The present study, however, does not consider this effect.

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