Minimum youth wage and unemployment – the spillover and direct employment substitution effect on young adults

Abstract

This paper aims to research the spillover effect and direct employment substitution effect of minimum wage changes. Both the Netherlands and United Kingdom have recently introduced policy changes concerning minimum wages. In the Netherlands wages between youth and adults are converging where in the United Kingdom these wages are diverging. Studying both countries allows for additional insight into these phenomena. A review of existing empirical literature indicates that the spillover effect and substitution effect exist and are easy to analyse using a second control group. Additionally, due to time lag restrictions, it is not yet possible to measure the effects in both countries. Therefore, I advise the Dutch CPB to take these effects into account when they will evaluate the effects of the policy change in 2019, which could affect the Dutch’ government’s choice whether to introduce a second wage convergence in 2019.