%1 RIETI Discussion Paper Series 21-E-075 The Impact of the Minimum Wage Increase on Subjective Wellbeing: Evidence from Japan SATO, Kazuma Takushoku University The Research Institute of Economy, Trade and Industry https://www.rieti.go.jp/en/ RIETI Discussion Paper Series 21-E-075 August 2021 The impact of the minimum wage increase on subjective wellbeing: Evidence from Japan 1 Kazuma Sato Takushoku University Abstract This study examines the association between subjective wellbeing and minimum wage using the Japan Panel Survey of Consumers (JPSC). JPSC investigates Japanese young and middleaged women with a relatively high proportion of low-paid, non-regular workers. Based on fixed-effects models, the estimated results revealed no significant effect of minimum wage when using the continuous variable of life satisfaction as the dependent variable. However, we found a significant positive association between the minimum wage and life satisfaction when a dummy variable indicating whether the respondent had a high life satisfaction was used as the independent variable. This positive association was robust against estimation methods and the change of the definition of the treatment group that was affected by the minimum wage and the control group that was not affected by the minimum wage but worked at wage levels near the minimum wage. The estimated results of this study are partially consistent with previous studies examining the effect of introducing the minimum wage in Germany. Keywords: minimum wage, subjective wellbeing, fixed-effects model JEL classification: I31, J31 The RIETI Discussion Paper Series aims at widely disseminating research results in the form of professional papers, with the goal of stimulating lively discussion. The views expressed in the papers are solely those of the author(s), and neither represent those of the organization(s) to which the author(s) belong(s) nor the Research Institute of Economy, Trade and Industry. 1This study is conducted as a part of the Project“Research on Working-style Reform, Health and Productivity Management” undertaken at the Research Institute of Economy, Trade and Industry (RIETI). This study utilizes the micro data of the Japan Panel Survey of Consumers (JPSC), which is conducted by the Panel Data Research Center at Keio University. The author is grateful for helpful comments and suggestions provided by Daigo Nakata, Kotaro Tsuru, Makoto Yano, Masayuki Morikawa, Sagiri Kitao and participants at the RIETI discussion paper seminar. 1 1. Introduction A minimum wage is instituted in many countries to protect workers’ basic needs. However, excessively raising the minimum wage level could reduce employment. Many empirical analyses examine the negative effect of minimum wage on employment, particularly in the US, and provide mixed results (Neumark & Wascher, 2007; Neumark et al., 2014 for a review). For example, several studies demonstrate a negative employment effect (Neumark & Wascher, 1992; Burkhauser et al., 2000; Zavodny, 2000; Rama, 2001; Machin et al., 2003; Bossler & Gerner, 2016; Gittings & Schmutte, 2016; Lopresti & Mumford, 2016; Sabia et al., 2016; Schmitz, 2017; Sturn, 2018). However, other studies find no negative employment effect (Card, 1992; Katz & Krueger, 1992; Machin & Manning, 1994; Dickens et al., 1999; Dube et al., 2010; Dolton et al., 2015; Garloff, 2016). Based on these results, a definitive conclusion has not been reached yet. Several studies have recently explored the association between minimum wage and subjective wellbeing (SWB) (Bossler & Broszeit, 2017; Gülal & Ayaita, 2019). These studies assume that raising the minimum wage can increase SWB in two ways. First, raising the minimum wage can increase the SWB of affected low earners as SWB is positively related to absolute income (Frijters et al., 2004; Gardner & Oswald, 2007). Second, raising the minimum wage can reduce income disparity and relative deprivation negatively associated with SWB (Boyce et al., 2010; Card et al., 2012). Thus, a minimum wage increase could be positively associated with SWB. Accordingly, Bossler and Broszeit (2017) and Gülal and Ayaita (2019) examine the relationship between minimum wage and SWB; they use the introduction of a new statutory minimum wage in Germany of €8.50 per hour as a quasi-experiment. Using the difference-in-differences approach, Bossler and Broszeit (2017) find that introducing a minimum wage increases job and pay satisfaction. They examined the effects of the minimum wage on work engagement and turnover intention and found no significant relationships. In addition, Gülal and Ayaita (2019) use the difference-in-differences approach and reveal a positive association between SWB and life, job, and pay satisfaction. They find that the positive effect of minimum wage continues to 1 year after the introduction of the minimum wage. The abovementioned two studies are interesting as they provide new empirical evidence regarding SWB and minimum wage, which has not been examined thus far. However, those studies focus on the case of Germany only. Therefore, whether the same results will be obtained using data from other countries with different minimum wage systems remains unclear. The present study examines the association between SWB and minimum wage using the Japan Panel Survey of Consumers (JPSC). JPSC is one of the representative panel data that surveys young and middleaged women in Japan. The statutory minimum wage has been established in Japan since its Minimum Wage Law was enacted in 1959. The regional minimum wage by prefectures plays a vital role in Japan and is revised every year considering the economic situation and the supply and demand of the labor market. This study provides new empirical evidence regarding minimum wage and SWB using annual changes in minimum wages by prefectures as a quasi-experiment. This study has several contributions. First, this study is the first to examine the association between SWB and minimum wage using Asian data. Notably, we can analyze long-term data compared with Germany as the minimum wage was introduced decades ago in Japan. Second, this study controls time-invariant 2 individual heterogeneity by using the panel estimation method. The fixed-effects (FE) model examines the association between SWB and minimum wage. Third, we check the robustness of the estimated results by changing the definitions of the treatment and control groups, which are affected and not affected by the regional minimum wage, respectively. Nevertheless, the control group works at wage levels near the minimum wage. The definition of the treatment and control groups is one of the issues in the analyses examining the effect of minimum wage. The present study defines the treatment group as workers whose wages in period t − 1 are higher than the minimum wage in the same period but lower than in period t. The treatment groups are the low earners affected by minimum wage change in each period. The control group is workers whose wages in period t − 1 are higher than those in period t. Additionally, the control group is restricted to workers whose wages in period t − 1 are above the minimum wage threshold in period t; this limitation allows obtaining a sample with attributes close to those of the treatment group. The control group is restricted to workers whose wages in period t − 1 are below 150% of the minimum wage in period t; this restriction is based on Bossler and Broszeit (2017) and Gülal and Ayaita (2019). The control group includes workers whose wage level is close to the minimum wage, although it is not affected by minimum wage changes. This study uses life satisfaction as a measure of SWB. Life satisfaction is measured on a 5-point scale, where high values indicate high satisfaction. The analysis uses two types of dependent variables: the continuous and dummy variables of life satisfaction. The dummy variable of life satisfaction equals 1 if life satisfaction is rated as “very much satisfied” or “quite satisfied” and 0 otherwise. In addition, this variable indicates whether respondents have high life satisfaction. In the analysis, biographical, educational, and job-related attributes are controlled. The estimated FE model results show no significant association between the continuous variable of life satisfaction and minimum wage. However, the dummy variable of life satisfaction and minimum wage show a significant positive association. This positive relationship is robust regarding the estimation method and the definition of the treatment and control groups. Thus, minimum wage likely increases life satisfaction in Japan. This result is in line with Bossler and Broszeit (2017) and Gülal and Ayaita (2019) and shows that minimum wage improves wage level and SWB. The remainder of this paper is organized as follows. Section 2 discusses previous studies, and Section 3 explains Japan’s statutory minimum wage. Section 4 explains the data, and Section 5 shows the empirical strategy. Section 6 discusses the estimation results. Lastly, Section 7 provides the concluding remarks. 2. Literature Review Empirical studies on minimum wage and SWB include Bossler and Broszeit (2017) and Gülal and Ayaita (2019). Using the German Linked Personnel Panel provided by the Institute for Employment Research, Bossler and Broszeit (2017) examine the effect of the introduction of minimum wage on pay and job satisfaction. In Germany, a new statutory minimum wage of €8.50 per hour was established on January 1, 2015. Bossler and Broszeit (2017) examine whether pay and job satisfaction differ between affected lowincome workers and unaffected workers before and after introducing minimum wages. Their study defines treatment groups affected by the minimum wage and control groups as those whose wages in 2013 are 3 below and above €8.50, respectively. Furthermore, they use the subjective treatment assignment to inquire respondents about whether they feel affected by the minimum wage in 2015. The estimated result using the difference-in-differences approach using data from 2013 to 2015 reveals a positive relationship between minimum wage and pay satisfaction. This result is generated using the treatment assignment based on hourly wage in 2013. Conversely, pay and job satisfaction positively associate with minimum wage when using the subjective treatment assignment. Gülal and Ayaita (2019) also focus on introducing the minimum wage in Germany using the German Socio-Economic Panel. They define treatment and control groups as workers whose hourly wages in 2014 are below €8.50 and between €8.50 and €12.75 (50% higher), respectively. The result of the difference-indifferences analysis using data from 2014 to 2015 indicates that the introduction of minimum wage increases life, pay, and job satisfaction of affected low earners. The results are robust against the change in the definition of the treatment group. Additionally, Gülal and Ayaita (2019) find a difference in the effect among East and West Germany workers. The impact of minimum wage on workers’ SWB is more substantial in East Germany than in West Germany. In Japan, no study has examined the association between SWB and minimum wage. Nevertheless, certain studies investigate the effect of minimum wage on employment and earnings. Kawaguchi and Yamada (2007) discuss the unemployment effect of minimum wage using the JPSC. Their result demonstrates that minimum wage significantly negatively impacts affected low earners whose current wages are below the revised minimum wage. Kawaguchi and Mori (2009) use the micro-data of the Employment Structure Survey and demonstrate that the minimum wage has an unemployment effect on male teenagers and middleaged married women. Their study reveals that most workers earning a minimum wage are non-household heads. Moreover, more than 70% of minimum wage workers are women, with a large proportion of those aged 30–59 years. Kambayashi et al. (2013) examine the impact of minimum wage on wage distribution using cross-sectional data from the Basic Survey on Wage Structure. They found that minimum wage increase compresses the lower tail of the wage distribution among women. Using the Keio Household Panel Survey, Higuchi (2013) demonstrates that raising the minimum wage increases wages of non-regular workers, particularly females, but does not have an unemployment effect. In summary, previous studies based on German data present a positive association between SWB and minimum wage. In contrast, no study has examined the effect of minimum wage on SWB in Japan, whereas certain studies examine the relationship between minimum wage and employment and earnings. The present study provides new empirical evidence regarding the association between SWB and minimum wage in Japan and fill the studies’ gap. 3. Statutory minimum wage in Japan Japan’s statutory minimum wage system sets a minimum wage based on the Minimum Wage Law and requires employers to pay wages above this minimum wage. The country has two minimum wage types: minimum wage by region and by industry. The present study focuses on regional minimum wage because 4 the industrial minimum wage has limited coverage and is gradually abolished (Kawaguchi & Mori, 2009). Regional minimum wages apply to all workers within a prefecture, regardless of industry and occupation. Japan has 47 prefectures, in which the minimum wage has been set since 1976. Regional minimum wages are revised annually. The following steps determine regional minimum wages. First, the central minimum wage council discusses and presents the criteria for raising the minimum wage. The council comprises representatives of public interest, employees, and employers. Second, each prefecture’s regional minimum wage council discusses and reports the minimum wage based on the region’s actual situation according to the criteria of the increasing amount; the central minimum wage council indicates these criteria. Lastly, the prefectural labor bureau chief determines the regional minimum wage level based on the reports of the regional minimum wage council. Figure 1 displays the average minimum wage level and its change rate in prefectures from 1993 to 2015, the analytical period of this study. The figure illustrates that the average minimum wage is rising moderately. In contrast, the minimum wage change rate declined until 2003. This decline was due to the long-term recession caused by the collapse of the bubble economy. After that, the economy has gradually recovered, and the minimum wage rate change rate has been increasing. The minimum wage will not be reduced and tends to remain unchanged, despite the recession period, to ensure workers’ livelihood. Thus, the minimum wage change rate has not fallen below 0. This rate has increased since 2007 due to the revised Minimum Wage Law in 2007. The revision stipulates that the welfare received should be consistent to avoid exceeding the minimum wage income. 4. Data This study uses data from JPSC, which surveys data on families, income, employment, wellbeing, and residential place and type in Japan. JPSC conducts its annual survey every October using a two-step, stratified sampling method. JPSC was first implemented in 1993, with 1500 female respondents aged 24– 34 years. The data available for this study are from 1993 to 2015, with additional samples provided from 1997, 2003, and 2008. JPSC provides the data of the prefectural codes of each respondent. This study uses the prefectural codes to match regional minimum wage and respondents. Using JPSC has the advantage of an extended data period, which allows us to obtain many samples compared with other panel data in Japan. Conversely, the disadvantage of using JPSC is that it only surveys women. However, the analyzed samples of JPSC are considered appropriate when examining the effect of the minimum wage because most minimum wage workers are women, as stated in Kawaguchi and Mori (2009). This study analyzes women who continue to work in non-regular employment from the t − 1 period to the t period. We restrict the sample to non-regular employment because regular and non-regular workers 5 have significantly different working conditions, and most minimum wage workers are non-regular 2 (Kawaguchi & Mori, 2009). Moreover, the analyzed samples are restricted to workers who continue to work at the same company to control the change in working conditions due to job changes. Furthermore, we remove the samples that move across prefectures to eliminate the impact of minimum wage level changes due to movement. After deleting missing variables used in the analysis, 5,392 observations were included in the analysis. 5. Empirical Method This study examines the effect of minimum wage on SWB using Japanese panel data. We estimate two econometric models using panel estimation methods as follows:
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