Dynamic Interactions between Regional Unemployment, Self-employment, and Minimum Wage

This study examines the relationship among unemployment, self-employment, and minimum wage changes in Korean regions from 2008 to 2023 using fixed effects, dynamic panel, and panel vector autoregressive (PVAR) models. We find that relatively high minimum wages reduce self-employment by increasing opportunity costs while also raising unemployment. Effects vary by region and type of self-employment - own-account workers are more vulnerable than employers, and metropolitan cities experience stronger labor market disruptions than provinces, where informal sectors absorb shocks. Although minimum wage increases initially discourage self-employment, our PVAR analysis indicates a gradual recovery of self-employment after three years, suggesting potential long-term entrepreneurial activity. Robustness checks using alternative measures of the minimum wage confirm the consistency of our findings. These findings highlight the need for minimum wage policies that consider regional labor market differences and support small businesses to mitigate adverse effects.