**Because there are no reliable estimates of wage elasticity of labor demand for Kosovo, we also conduct sensitivity analyses to examine how the estimates vary for different wage elasticity values, which determine the fraction of those who lose jobs because of changes in the minimum wage policy.** The estimates of the labor demand elasticity from the economic literature suggest relatively high labor demand elasticity in Eastern European countries. In Kosovo, this elasticity might be especially high given the country’s high unemployment rate (29.6 percent in 2018), which reflects an economy with less capacity to absorb minimum wage spikes. When we assume large values of wage elasticities, the simulated net effect on earnings becomes negative, suggesting that the decrease in earnings due to job losses may exceed the increase in earnings due to high minimum wage among those that remain employed. Therefore, the minimum wage increase in Kosovo from the current level to a hypothetical 250 euros could not only fail to target the poor but also increase the unemployment rate and poverty level.

**The remainder of the paper is organized as follows** . Section II describes the stylized facts, including sources of data and definitions, and recent trends in labor market outcomes and wages. Section III covers distributional implications and the size and profile of the group most likely to be affected by the policy reform (i.e., the group with earnings between the current and the proposed minimum wage). Section IV includes the potential impact of the changes in minimum wage on labor market outcomes using microsimulation techniques. Section V summarizes the findings and policy implications.

# **II. Stylized Facts**

**Kosovo is facing significant labor market challenges that are detrimental to poverty reduction** . Less than one-third of the adult population holds a job, almost nine out of ten women are not working, and over half of active youth are unemployed. The quality of available work is low with high levels of informal employment. Kosovo still has high poverty rates, with about 18 percent of Kosovars living in poverty according to the most recent 2017 Household Budget Survey (HBS) data. As labor is the main source of income for the majority of the population in Kosovo (above 60 percent for all quintiles), low employment rates and low wages contribute to material deprivation for workers and their families. Importantly, poverty is related to labor market attachment, and growth in labor income has been the main driver of poverty reduction in recent years — either because of higher employment rates or because of increased labor earnings.

**In this section we present trends during the period 2012-2018 in labor force participation, unemployment, and informality, factors important to the design of an optimal minimum wage policy.**

Data sources and definitions

**The analysis presented in this paper relies heavily on the 2012-2018 Kosovo Labor Force Survey (LFS), a continuous household survey, with data collected each week of the year by the Kosovo Agency of Statistics (KAS).** The survey collects detailed data on labor market indicators as well as other standard sociodemographics including age, gender, employment status, economic activity, occupation and other variables related to the labor market.  The data are representative at the urban and rural level. The sampling frame was based on the data and cartography from the 2011 Kosovo Census, and a stratified two-stage sample design was used for the 2012-2018 Kosovo LFS. In our analysis, we focus on the working age population (age 15-64) and use survey weights computed by KAS to adjust the estimates for the survey design.

**Measuring individual earnings is challenging, in part because of the quality of wage data in the LFS.** Wages are collected in intervals or brackets and so estimating reliable point estimates is difficult. Figure 2 shows

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