Regression Analysis: Impact of Minimum Wage Policies on Youth Unemployment in Pakistan from a Living Wage Perspective
The employment effects of minimum wages remain a debated issue since the evidence is mixed. Some studies conclude large negative estimates for employment elasticity, some occasional positive estimates, and others conclude employment elasticities of low-skilled groups to be zero. With rising poverty and income inequality in developing countries, labor economics is now more focused upon the link between statutory minimum wages and employment of low-skilled workers, as it provides a means to formulate better-informed policy decisions. Additionally, economists are now shifting to living wage ordinances as a means to improve working and living conditions of workers. This study will be an attempt to analyze what impact minimum wage has upon youth unemployment in Pakistan, a country having the world's ninth largest labor force, with 4 million young people reaching working age each year, and how it compares to the required living wage. The results of this study will have an important bearing and will help redesign labor policies that have maximum impact upon the income and living standards of low-skilled workers.
a. A linear regression model took the data from 2010 to 2020 from the Pakistan Labour Force Publications. The independent variable is unemployment across different provinces in Pakistan in millions. The dependent variables are minimum wage across Pakistan in millions, literacy rate across provinces in Pakistan and migration rate across provinces in Pakistan. b. The model for estimating the living wage was inspired by the Global Living Wage Series Urban Pakistan Sialkot Study (Sayeed and Dawani 2019) and was based upon the Anker Methodology (Anker and Anker):
- Cost of a basic but decent life for reference size family = Cost of food + Cost of housing + Cost of other essential needs + Small margin for unforeseen events
- Net Living Wage = Cost of basic but decent life for a family ÷ Number of workers per family
- Gross Living Wage = Payroll deductions and taxes + Net living wage For estimating the living wages for each province, I used the data from Household Integrated Economic Survey (HIES) 2018-19 and several other sources (which are listed in the report). This model was estimated for urban regions for the provinces of Sindh, Punjab, Balochistan and Khyber-Pakhtunkhwa since wage laws are fairly implemented in such regions.
Various tests were conducted to acquire the results and after a thorough evaluation of the data, it is concluded that there is an impact of minimum wage policies on the rate of unemployment. According to the data evaluated, the province with the highest number of unemployed youth was KPK. Furthermore, it is concluded that the change in unemployment rate throughout Pakistan was observed during the period of 2018-2019 whereas, the change in minimum wage was observed during 2019-2020. The regression analysis conducted across provinces concludes that an increase in minimum wage leads to an increase in the unemployment rate. The reason behind this may lie in the high production costs incurred to the employer as a result of this wage increase. Further, the living wage, a better alternative to minimum wage, was also estimated for Pakistan on a provincial level for the year 2022. This may serve as a more efficient measure for minimum wages required for a decent standard of living and may be used for an improved policy analysis.