Unemployment transitions and the role of minimum wage: From pre-crisis to crisis and recovery

In the last decades, the issue of mobility in the labor market has been the core of the policy-making agenda in terms of increasing flexibility and ensuring higher levels of labor market participation and employment. There are different types of labor market mobility that can be studied such as geographical mobility of workers, mobility across different sectors, changing jobs within the same sector, shifts from full-time to part-time and vice versa, as well as transitions from employment to unemployment or inactivity, and vice versa.

Particularly, in times of economic downturns, labor market flexibility is considered to be an important tool to decrease unit labor cost and restore competitiveness. This was the case of Greece during the recent economic crisis, as in the pre-crisis era wages grew faster than the productivity growth and much faster than the Euro area average.

In particular, the wage growth consistently outpaced productivity gains (31.3% vs 6.8%) over the decade preceding the Greek crisis, in part reflecting spillovers from high public wage increases.

The labor market measures pursued during the three bailout programs focused on the framework of collective bargaining,

The reforms related to collective bargaining included: (a) the reduction of length of collective contracts’ validity and revisions of the “after effects” of collective contracts, (b) the removal of “tenure” in all existing legacy contracts in all companies, (c) the freeze of “maturity” until unemployment falls <10%, (d) the decentralization of collective bargaining even at individual level.

Most of the labor market measures were front-loaded in the program period and in fact the liberalization of the labor market moved in a much faster pace than the product market deregulation. Despite the reforms undertaken, unemployment in Greece skyrocketed from 7.8% in 2008 to 27.5% in 2013, while the equivalized disposable income declined by 42%, much more than the decline in GDP per capita that was 26% in real terms

The largest drop in disposable income was recorded between 2009 and 2014, while the largest drop in GDP was recorded between 2007 and 2013. Year 2007 is the last one with a positive growth rate before the crisis, 2009 is the year with the highest disposable income, while 2013 is the peak of the crisis in terms GDP drop.

The contribution of this paper lies in the fact that it studies unemployment exits and entries and identifies what are the determinants that could enhance or disrupt labor market mobility in a period that includes the unique Greek economic crisis, as well as the years preceding the crisis and the years of the recovery. The fact that, in this period, two large changes in opposite directions in the statutory minimum wage occurred, offers also the opportunity to examine whether the minimum wage plays a role as determinant of transitions from unemployment to employment and vice versa. We also contribute to the relevant literature by estimating individual transition probabilities using microdata from the Greek LFS which include a longitudinal identifier that can track individuals across waves, and not only the cross-sectional component which is more commonly used in methods that study the minimum wage effect such as difference-in-difference estimation. In this way, we also exploit the full sample of working age population and there is no need to restrict the sample into a treatment and control group. In addition, we analyze whether a change in the minimum wage level affects the probability of exiting or entering unemployment measured at the individual level, while at the same time controlling for a series of other determinants (individual characteristics, macroeconomic conditions, regional characteristics, etc.) as well as unobserved heterogeneity across individuals. Finally, the particular characteristics of the examination period allow us to split the sample in sub-periods defined by the growth rate of the economy and thus examine whether the effect of the traditional determinants such as age, gender, marital status, and educational endowment is differentiated during economic downturns and to what extent these determinants account for individuals’ transition from employment to unemployment in comparison to reform effects such as the minimum wage changes.

The findings of this paper are useful for policy making not only at national but also at the EU level and can contribute to the on-going discussion on the Directive of the European Parliament and of the Council on adequate minimum wages in the European Union. In the legislative proposal, the European Commission (2020a) considers adequate wages an essential component of the EU model of a social market economy and presents a clear position that convergence among Member States in this area contributes to improving the fairness of the EU labor market, stimulating productivity improvements and promoting economic and social progress. It also states that the role of minimum wages becomes more important during economic downturns. As a reaction to the proposed directive, a general discussion has been stimulated, also by the IMF recommending wage restraint in countries with a weaker external position and sluggish productivity growth and faster wage growth in countries with a stronger external position to help the rebalancing process (Detragiache et al., 2020). This debate is highly relevant in the current period of the Covid-19 crisis, which has particularly hit sectors with a higher share of low-wage workers such as retail and tourism and has had a stronger impact on the disadvantaged groups of the population. It is also relevant for the post-Covid period, given that increased automation, digitization, and robotization are expected to contribute even further to job polarization in the EU, as a decline of employment in medium-paid occupations and a simultaneous increase in low and high-paid occupations is on-going (Sebastian and Biagi, 2018; European Commission, 2020b).

These considerations make the study of the Greek case even more interesting for estimating the effects of changes in minimum wage in different phases of economic cycles. The rest of the paper is structured in the following way: the Section 2 presents a literature review, while Section 3 presents the data and the methods used in the applied analysis. The results are outlined in Section 4 and Section 5 concludes.

The paper touches upon two distinct fields in the literature of labor economics: employment/unemployment dynamics and economics of the minimum wage. We combine elements of both fields to identify the determinants of mobility in the labor market from the perspective of identifying what are the factors that affect the individual probability of making a transition into or out of unemployment. The relevant literature includes studies focusing on individual characteristics such as education, gender, marital status, etc., as well as on macroeconomic and policy components such as the phase of the economic cycle, the impact of specific labor market institutions like the minimum wage and the unemployment benefits (Meyer, 1990; Atkinson and Micklewright, 1991; Michaud and Tatsiramos, 2005; Flinn, 2006; Tatsiramos, 2009; Murtin and Robin, 2018). Another stream of this field studies unemployment state dependence or duration dependence, i.e. the impact of past unemployment experience on the predicted unemployment probability, rather than individual characteristics (Akerlof and Main, 1980; Arulampalam et al., 2000; Arulampalam, 2002; Burgess and Turon, 2005).

Bradley et al. (2003) focus on skills and find that high-skilled workers are more likely to keep a “good” job, but unskilled workers seem to be trapped in a vicious cycle of employment in the low-skilled sector or inactivity. They also find evidence of scarring effect of past unemployment. Gangl (2003) confirms this for United States and Germany concluding that high-skilled workers experience shorter spells of unemployment. Uhlendoff and Zimmermann (2014) also focused on individual characteristics and especially on nationality, finding that despite the fact that there are no differences in the probability of exiting unemployment per se between migrants and native Germans, the latter are estimated to spend less time in job search. However, they detect variations in probability of exiting from unemployment across ethnicities.

Caliendo and Uhlendorff (2008) analyze the mobility between self-employment, wage employment, and unemployment. They find that being non-employed in the past increases the probability of being self-employed and vice versa. Also, other individual-based determinants such as marital status, disability, nationality, number of children, and the attainment of higher educational level are examined. The relevant results reveal that these characteristics significantly affect the probability of moving from wage employment to self-employment or unemployment. Cassandro et al., (2020) present a novelty by adding the routine-task intensity of the occupation to the determinants of individual probability of getting unemployed. They find that workers employed in routine-intensive occupations do not display higher unemployment risk than the rest of the workforce. However, when cognitive and manual tasks are distinguished, it turns out that workers employed in occupations entailing a large proportion of routine cognitive tasks (such as workers employed in service occupations as cashiers or call-center operators) are in fact exposed to a relatively higher risk of becoming unemployed.

Apart from individual characteristics, a part of the literature has been dedicated to study the link between the phases of economic cycle and unemployment transitions. First, Cockx and Dejemeppe (2005) observe that exit from unemployment is significantly affected by seasonal and cyclical variations, but deterioration of skills and demotivation also play an important role on the unemployment probability. The relation between cyclical variations and unemployment transitions has also been studied by Shimer (2012) who realized that the workers’ separation probability in the US was weakly countercyclical until the mid-1980s, while it has been almost acyclical during the last two decades. Furthermore, Nagore Garcia and van Soest (2017) use administrative data from Spanish Social Security in a dynamic analysis of unemployment. They find that unemployment to employment transition is pro-cyclical while the converse transition is counter-cyclical. Also, they argue that the crisis impact was stronger in the job finding rates and weaker in the separation rates, highlighting the importance of policies that connect individuals with the labor market during recession.

At EU level, Ward & Macchiarelli (2014) and Monastiriotis et al., (2019), both detected significant differences in unemployment transition patterns, especially between countries of Southern Europe and Nordic countries. Moreover, these transitions are found to be sensitive to economic conditions as also found by Fontaine (2016) in the case of France. Hence, higher economic growth implies higher job retention rates, i.e., lower probability of getting into unemployment or inactivity. On the contrary, in times of economic recessions, the probability of moving from employment to unemployment or inactivity increases as job matching is more difficult and labor demand lowers significantly.

Regarding the impact of minimum wage on labor market flows, most studies find that a minimum wage increase is followed by a decrease both in job separation and job retention rates. In particular, Portugal and Cardoso (2006) argue that the impact of minimum wage on labor market flows differs across wage distribution as lower wages imply lower retention rates and higher separation rates. They justify that the 1987 minimum wage increase in Portugal, which concerned a very specific group of youth, led to an increase in job attachment for low-wage youngsters, reducing in total the high job turnover that is characteristic of low-wage workers. This relationship between low labor market flows and minimum wage increase is confirmed by Brochu and Green (2013). They argue that higher minimum wages do not facilitate entry into employment due to higher labor cost. On the contrary, higher minimum wages imply higher job stability. These results are also confirmed by Dube et al., (2016) for US, which in addition find that the duration of non-employment for separations or hires is not affected.

Generally, the minimum wage effect on employment remains a research and policy question not only of high interest but also controversy. Researchers often disagree finding either a negative effect especially on specific population groups (Neumark et al., 2014) or a non-significant employment effect of the minimum wage (Card and Krueger, 1994, 1995, 2000). Schmitt (2015) reviews empirical evidence on the employment effects of the U.S. minimum wage and concludes that there is little or no employment response to modest increases. Harasztosi and Lindner (2019) find a small disemployment effect, which is greater though in industries where passing the wage cost to consumers by price increases is more difficult. The increase in retail prices may occur though with a significant time-lag from the increase of minimum wage as Fougère et al. (2010) observe, thus the causality may be hard to identify in some cases if multiple policies are implemented in the same period.

In a recent meta-analysis, Neumark and Shirley (2021) conclude that there is a negative estimated effect of the minimum wage on employment of teens, young adults, and less-educated workers. Manning (2021) supports that a possible negative employment effect due to a minimum wage increase might be offset by a consequent increase in productivity or a turnover decrease leading to a non-robust overall effect. Dube (2019) presents a full discussion of the existing applied evidence to inform the UK Low Pay Commission on the assessed impact of minimum wages, concluding that existing research totally points to a muted effect of minimum wages on employment, which is close to zero when the study considers a broad groups of workers, while suggesting that minimum wages significantly increase the earnings of low paid workers.

Concerning minimum wage in Greece, Yannelis (2014) and Kakoulidou et al., (2018) focus on the 2012 minimum wage reform and its impact on employment and unemployment dynamics. A substitution channel between workers below and above 25 years is found by Yannelis due to the youth subminimum wage introduction. Hence, the latter led to a relative positive effect on employment for those aged <25 years in comparison with those >25 years. As for employment dynamics, the positive employment effect is through new hires, while there is no effect through job destructions. On the contrary, Kakoulidou et al., do not find significant changes in employment probability between two close substitute age-groups (22–24 and 25–27), but they find a positive impact on the job-finding rate and no significant impact on job losses. Kanellopoulos (2015) finds that minimum wages are closely related to developments in average remuneration in the private sector and that an increase in minimum wages results in substantial job losses.

A broader assessment of labor market reforms during the period of the Greek crisis, placing emphasis on measures related to wage setting, including the framework of collective bargaining as well as national minimum wage setting, is presented by (Gatopoulos et al., 2021). The authors consider year 2012 to be the critical year for labor market reforms as most of them were enacted at that time. They also explain that the rationale of the new mechanism of minimum wage setting was to strengthen evidence-based wage floor setting. In this respect, the reforms were aiming, inter alia, at removing automatic increases in bonuses and allowances that, over time, decoupled wages from productivity. Examining the presence of a wage curve in the Greek labor market, Daouli et al., (2017) find that a negative relationship between wages and regional unemployment emerged only in the period 2010Q2–2011Q4, apparently due to the restructuring of the collective bargaining regime and the reduction in the national minimum wages. On the contrary, Cholezas and Kanellopoulos (2015) provide evidence of a wage curve in Greece for the period 2004–2010 with a magnitude of the wage elasticity similar to that suggested by international evidence. Moreover, they prove that the negative relationship between wages and unemployment seems to have been strengthened by the labor market deregulation reforms of the economic programs.

Finally, Georgiadis et al., (2020) observe that wage and employment adjustments to the 2012 reduction of the minimum wage do not seem to be entirely consistent with a negative relationship between wages and employment, as the competitive model of the labor market would predict. In particular, they find that in firms with a large share of youth employment, the share of youth did not change or even decreased despite the fact that youth wages decreased significantly. At the same time, these firms were characterized by higher decreases in adult wages and a higher probability that adult employees move to another firm. In a recent study, Bechlioulis and Chletsos (2021) also deploy the effects of the two opposite minimum wage changes (in 2012 and 2019) not on employment level but on the job search rate and on the job loss rate.

Bechlioulis and Chletsos (2021) focus on the job searches and job losses. The current paper focuses on unemployment entries, which partially correspond to job loss as they do not include only firings, and to unemployment exits which correspond to finding a job not just searching for one. Also, Bechlioulis and Chletsos use a total different methodology with difference-in-difference estimation. In order to apply this methodology, they construct a treatment group of females aged 15–44 who attended at most secondary education (a low-wage group) and a control group of males aged 45–64 who completed at least the secondary education (a high-wage group). They also keep only the second quarter in order to control for seasonality. The estimation of individual probabilities through the logit model that we use gives us the opportunity to exploit the full sample, while using quarter dummies to control for seasonality. We also include in our analysis the pre-crisis period, and split the analysis into three periods (pre-crisis, crisis and recovery) in order to check the robustness of our results or possible differentiations across periods.

By exploring the effect of the minimum wage on unemployment transitions and controlling for other socioeconomic, macroeconomic, and regional factors, the current study adds to the relevant literature. The key elements of the paper's contribution are the introduction of a minimum wage — related variable, individual characteristics and economic growth into a single model in order to estimate the effect of minimum wage on unemployment transition. Further the estimation is conducted for a long period including the unique deep and prolonged economic crisis period when the national minimum wage was abolished, and a youth sub-minimum wage was introduced and then abolished. Finally, the data used include a unique longitudinal identifier which enables the tracking of individuals across waves and helps the estimation of individual transitions’ probability through logit model, thus avoiding to restricting the sample to treatment and control group.

The analysis of this paper is based on quarterly microdata from Greek LFS between 2004 and 2019. The Greek LFS, produced by the Hellenic Statistical Authority (EL.STAT.) on quarterly basis, provides data on labor force participation of people aged >15 years. LFS dataset is a rotating panel dataset as one-sixth of the sample is replaced each quarter. Thus, each individual can participate in the survey for up to six quarters (q1–q6). In total, the pooled panel we use comprises of 4,320,662 observations corresponding to 832,542 individuals participating in the survey for at least one quarter. The dataset used in the logit analysis is the unbalanced one. Yet, for spell analysis the balanced panel is also used, which includes only those individuals who participate in the sample for six consecutive quarters. The balanced dataset includes 1,433,022 observations corresponding to 238,837 individuals. In the following analysis, both balanced and unbalanced datasets have been restricted to working age population (15–64 years old) in the private sector

Public sector has been excluded as the public sector workers are protected towards unemployment and also the minimum wage changes do not affect the employment decisions for public sector entities. Thus, their inclusion could distort the results related to the minimum wage effect.

One way to investigate unemployment transitions is through individuals’ employment and unemployment spells (Kaitz, 1970; Akerlof and Main, 1980). An unemployment spell can be defined as a period during which the individual is unemployed and, thus, an unemployment spell in our analysis starts from the first quarter that the individual is unemployed to the quarter that he finds a job. In this way, the total period of survey for each individual is divided into smaller periods (spells into and out of unemployment). The study of frequency and duration of unemployment spells is important for policy making as it offers an indication of the size of mobility in the labor market and of the extent to which unemployment is transitional or more permanent. The main drawback of spell analysis is the problem of left and right censoring, caused by the fact that the length of spells is limited by the observation window of the survey (6 months in the case of the LFS).

Apart from studying the frequency, duration, and recurrence of unemployment through spell analysis, the determinants of transitions into and out of unemployment are examined focusing on the role of minimum wage, certain individuals’ socioeconomic variables, and controlling also for macroeconomic, regional determinants as well as for the unobserved heterogeneity. The model used is a simple binary multivariate logistic model: Pr(yit=1)=F(βxit)=pit {Pr}\left( {{y_{it}} = 1} \right) = F\left( {\beta {x_{it}}} \right) = {p_{it}} and Pr(yit=0)=1−F(βxit)=1−pit, {Pr}\left( {{y_{it}} = 0} \right) = 1 - F\left( {\beta {x_{it}}} \right) = 1 - {p_{it}}, where y_it is the dependent variable capturing the transition in question (transition into or out of unemployment). y_it = 1 when the individual has a transition (enters or exits unemployment) and y_it = 0 when the individual is in the same status as in the previous period. F is the logistic distribution F(z)=exp(z)1+exp(z)=Λ(z) F\left( z \right) = {{{exp}\left( z \right)} \over {1 + {exp}\left( z \right)}} = \Lambda \left( z \right) , x and β are vectors of explanatory variables and their coefficients, respectively. When we control for unobserved heterogeneity or frailty, an individual-specific unobserved characteristic u is added. Pr(yit=1)=F(βxit+uit)=pit \Pr \left( {{y_{it}} = 1} \right) = F\left( {\beta {x_{it}} + {u_{it}}} \right) = {p_{it}}

We estimate u using random effect techniques, in particular Gauss-Hermite quadrature, assuming that unobserved heterogeneity is identically and independently distributed over the individuals and follows a normal distribution.

In the tables, we present the standard deviation of the heterogeneity variance, “sigma_u,” and “rho” which is the ratio of the heterogeneity variance to one plus the heterogeneity variance

rho=(sigma_u)21+(sigma_u)2 rho = {{{{\left( {sigma\_u} \right)}^2}} \over {1 + {{\left( {sigma\_u} \right)}^2}}} . If the hypothesis that rho is zero cannot be rejected then frailty is unimportant.

In the basic specification of the model for unemployment entry or exit, the estimated x is a vector including three groups of independent variables. One group contains variables related to the minimum wage (percentage difference of minimum wage level from year to year and interactions with age groups). A second group contains variables related to the socioeconomic status of the individuals such as age group, gender, marital status, and nationality. Finally, a third group contains variables capturing geographical regions, seasonality and the quarter-on-quarter (q-o-q) difference in growth rate.

It should be underlined that the given the limited length of the observation window (six quarters), the dataset includes both left-censored and right-censored cases, which contribute to the calculation of the relevant probabilities for as long as they are observed in the sample. Also, the unbalanced panel is used for the estimation of the logistic regression, and in that case right-censoring may be also due to attrition. Yet, given the rotational design of the LFS and its small length, attrition rates are low.

In the paper, we examined the determinants of the unemployment dynamics and the impact of the minimum wage on the probability of making a transition into and out of unemployment. We used micro-level data from the Greek LFS for the period 2004–2019 and controls for several demographic factors, macro-economic conditions, regional differences, and the change in national minimum wage.

Overall, the findings suggest that there is no causal relationship between minimum wage changes and transitions into unemployment, while transitions out of unemployment seem to be slightly positively affected by increases in minimum wage, which is contrary to what we would expect particularly for the period of the economic crisis. Splitting the sample into three different periods does not alter this main finding. The results are also robust to different specifications of the model regarding the variable capturing the minimum wage as well as the insertion of control variables in the model.

The results also suggest that both observed and unobserved individual-level characteristics play an important role in making a transition into or out of unemployment. Age seems to be negatively related with the probability of entering unemployment, while on the other hand younger cohorts especially those aged 25–34 have the highest probabilities to find a job. Thus, it could be concluded that generally the youth experiences higher mobility in the labor market (in both directions into and out of unemployment) than the elderly in the examining period, which is consistent with the relevant literature and can be attributed both to employee and employer choices. Another interesting finding relates to gender and marital status. Women have higher probabilities to enter unemployment and much lower probabilities to exit unemployment. Yet, married women have much lower probabilities to lose their job, but at the same time, they also have lower probabilities to find a job once they enter unemployment. A further investigation of these effects would be interesting to see whether it is the labor demand or supply side that drives what is observed. In a similar way, immigrants are estimated to have lower probabilities of finding a job revealing the lower access to employment compared to that of Greeks. But, given that they are employed, they have a lower probability to lose their job than Greeks. The effect of formal education seems to be mixed, signaling that the traditional protective effect of education toward unemployment is diminishing during periods of downturn.

As far as the regional variables are concerned, estimates reveal a higher mobility in all other regions than in Attica both for unemployment entries and exits, with the corresponding probabilities being higher in areas with high share of tourism-related activity as in the regions of Southern Aegean, Ionian Islands, and Crete. Further, the impact of economy's growth rate follows the theoretical predictions as higher growth rates increase unemployment outflows and decrease inflows.

In total, the paper findings indicate that the mobility in the Greek labor market remains low in all periods of examination, despite the numerous reforms that have taken place during the three economic adjustment programs in relation to labor market institutions and regulations toward increasing flexibility. The majority of individuals (>90%) have experienced only one spell in employment or unemployment, while most of the unemployed (65%) are unemployed for the entire observation period (1.5 years), which depicts the large increase of long-term unemployment during the crisis. Thus, it is not clear to what extent the reforms were successful in reducing inequalities between labor market insiders and outsiders and the fragmentation of the labor market.

The results have important policy implications, given that the disemployment effect of the minimum wage seems to be very limited in the Greek labor market, while the socioeconomic characteristics and regional characteristics seem to play an important role. The paper contributes to the on-going discussion on the adequate minimum wage in the EU, as it offers an indication that minimum wage increases do not induce unemployment entries and at the same time may be slightly related with higher exits from unemployment, particularly for the youth. Hence, this finding should be interpreted with care as it may be related to the high level of job informality and segmentation in the Greek labor market. It certainly offers a chance to re-think of the effectiveness and scope of sub-minimum wage policies. Also given that this argument cannot hold for the total wage distribution, another issue, as Manning (2021) purports is to address the question of the extent to which the minimum wage can be raised without the emergence of significant disemployment effects.

In addition, policies that improve labor market participation incentives for women and eliminate any differentiation in costs between genders for the employer may help reduce the adverse effects that are observed for females in relation to exiting unemployment. The large differences across regions in labor market mobility from the perspective of transitions into and out unemployment reveal that there is room for public policies to exploit the dynamics that exist in labor demand in the different regions. Although labor demand in these regions has, to a large extent, seasonal characteristics, an appropriate investment policy could lead to the creation of permanent job positions. In addition, improving the skills of individuals through the educational system and reskilling or up-skilling programs, while targeting specific regions, may facilitate labor market mobility. Finally, interventions that will enhance labor market mobility across all dimensions, including different sectors, are important for the adaptation of skills and the reallocation that may be needed in order to face the new challenges of the automation and digitalization in the post-Covid era.