Minimum wage and unemployment in Russia: A new look on an old construct

Abstract

We investigate the unemployment effects of the minimum wage policy in Russia, focusing on possible reasons for the heterogeneity of the effects documented in previous literature. Using region-level data, we show that the policy increases both the unemployment rate among young workers and the rate of informality. We corroborate these findings by leveraging a sudden increase in the minimum wage in Kamchatka as a natural experiment. Next, we show that the magnitude of employment responses to minimum wage changes depends on the elasticity of capital-labor substitution, with stronger effects observed in industries where capital and labor are more substitutable. When substitution is not feasible, employers respond to the policy by hiring workers informally. Consistent with revealed separations and informal recruitment, we find limited income effects of the policy. These findings highlight the importance of accounting for existing production technologies and the extent of non-compliance when raising the wage floor.