In January 2001 the Hungarian government increased the minimum wage from Ft 25,500 to
Ft 40,000. One year later the wage floor rose further to Ft 50,000. The paper looks at the
short-run impact of the first hike on small-firm employment and flows between employment
and unemployment. It finds that the hike significantly increased labor costs and reduced
employment in the small firm sector; and adversely affected the job retention and job finding
probabilities of low-wage workers. While the conditions for a positive employment effect were
mostly met in depressed regions spatial inequalities were amplified rather than reduced.
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