Minimum Wage Shocks in an Estimated DSGE Model with Underreporting

By Alisher Tolepbergen

http://d.repec.org/n?u=RePEc:ajx:wpaper:20&r=dge

We build and estimate a New Keynesian DSGE model to analyze the macroeconomic effects of minimum wage shocks in an economy characterized by a high degree of wage underreporting. The estimation results suggest that the effect of the minimum wage shocks to all economic aggregates but employment is not significant. The impulse response analysis shows that a higher degree of underreporting results in less responsive dynamics to the minimum wage shocks. In addition, the magnitude of the responses is also affected by the share of Non-Ricardian households in the economy. Overall, we find that an increase in the minimum wage in the economy with a high degree of underreporting does not significantly affect the dynamics of macroeconomic variables.

Not all DSGE models need to be about the US or other western economies. There are good insights to be gained for other economies. This paper is using data from Kazakhstan to study how minimum wages can influence the economy when employers quite systematically report lower wages. Not much. This is mainly due to the leakage, as a simulation with little underreporting show some impact. Thus, while on the surface the economy may show higher wages after an increase in the minimum wage, not much actually changed.

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