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

Abstract

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 specifica-tions 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 re-duced 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.