Employment effects of minimum wages in a dual economy: Evidence from Thailand

This study employs both theoretical insights and empirical techniques to investigate the impact of a minimum wage increase on employment when minimum wage coverage is incomplete. Previous empirical studies on this topic have found conflicting results: while some find the share of the covered sector decreases, some find it increases. In the theoretical part, we extended the classic two -sector model and found both scenarios can occur depending on the parameters of the economy. Empirically, using as a natural experiment a novel minimum wage policy in Thailand whereby 40 percent of workers were not covered by the legislation, we found that one percent increase in the minimum wage reduced low -skilled employment in the covered sector by 0.1-1.1 percent and increased employment in the uncovered sector. The official unemployment rate also decreased because the rise in the minimum wage lowered the probability of covered employment to such a large extent that workers instead turned to the uncovered sector.