Impact of labour market liberalisation on minimum wage effects: The case of the construction sector in a small open economy

Objective: The objective of this article is to estimate the impact of the application of the bilateral agreement of Free Movement of Persons between Switzerland and the EU-15 countries on the labour market outcomes in the Swiss main construction sector. The analysis happens in the context of increasing minimum wage levels in the industry. Research Design & Methods: The included treatment variable, the minimum wage bite, is compared to the growth of sectoral employment. We conduct two specifications of a Difference-in-Difference model, controlling for different characteristics and spatial spillover effects. Findings: The results show that the introduction of the Free Movement of Persons reduced the growth rate of employment in the construction sector compared to the growing minimum wage bites, considering the cantons as a box. The results for the specification, including spillover effects, suggest that the employment variation in construction is guided in large part by the local and interregional economic trends. Implications & Recommendations: While in open market construction firms do not dispose of instruments to cover higher wages, a country sealing off its markets from an interconnected economic space could pay minimum wages above the marginal productivity of its workers. Contribution & Value Added: Making use of an exogenous institutional change, we contribute to the evolving international literature that examines minimum wage effects on labour market outcomes.