When the minimum wage really bites hard: The negative spillover effect on high-skilled workers

Minimum Wages and the Rise in Solo Self-Employment

“…Among others, positive spillovers can be explained by a substitution of low-wage for high-wage workers, as a result of the change in relative input prices. However, as discussed above, also negative spillovers can occur when additionally taking into account the scale effect (Gregory and Zierahn, 2022). 4 We contribute to this debate by demonstrating that indirect effects of minimum wage policies may not be limited to adjustments in dependent employment.…”

“…We explain our findings with an extension of the substitution-scale model by Gregory and Zierahn (2022). In their original model, a minimum wage introduction leads to a substitution of low-by high-skilled workers, due to the change in relative input prices (substitution effect).…”

“…By shedding light on these mechanisms and conditions, we aim to guide the empirical analyses. Our model builds 4 Our paper significantly differs from Gregory and Zierahn (2022) in terms of outcomes, scope and methodology. While they rely on micro-data to study the effects of the minimum wage on the wage distribution in the German roofing industry using a differences-in-differences design, we focus on industry-level data across four minimum-wage industries to study the consequences for solo self-employment using a synthetic control group approach.…”

“…on the minimum wage spillover model by Gregory and Zierahn (2022), but extends the model to allow high-skilled individuals to choose solo self-employment as an alternative to dependent employment. 5 We first describe the main set-up before discussing the consequences of minimum wages for the labor market and solo self-employment.…”

“…Whenever the scale effect exceeds the substitution effect, such as during an economic downturn, net demand for high-skilled workers declines (negative spillover effects). Whereas Gregory and Zierahn (2022) focus on dependent employment, we introduce solo self-employment to the model. In particular, high-skilled workers can now choose between dependent and independent employment (i.e., solo self-employment).…”