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Does the Minimum Wage Cause Inefficient Rationing?

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Author Info
Erzo Luttmer (Harvard University)

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Abstract

By not allowing wages to clear the labor market, the minimum wage could cause workers with low reservation wages to be rationed out while equally skilled workers with higher reservation wages are employed. This paper exploits overlapping CPS panels to more precisely identify those most affected by the minimum wage, a group I refer to as the "unskilled." I test for inefficient rationing by examining whether the reservation wages of employed unskilled workers in states where the 1990-1991 federal minimum wage increase had the largest impact rose relative to reservation wages of unskilled workers in other states. I find that proxies for reservation wages of unskilled workers in high-impact states did not rise relative to reservation wages in other states, suggesting that the increase in the minimum wage did not cause jobs to be allocated less efficiently. However, even if rationing is efficient, the minimum wage can still entail other efficiency costs (e.g., from employment reductions).

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Contributions to Economic Analysis & Policy.

Volume (Year): 7 (2007)
Issue (Month): 1 ()
Pages: 1768-1768
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Handle: RePEc:bep:eapcon:v:7:y:2007:i:1:p:1768-1768

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Related research
Keywords: rationing minimum wage job allocation misallocation cost allocative efficiency

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Find related papers by JEL classification:
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Katz, L.F. & Krueger, A.B., 1992. "The Effect of the Minimum Wage on the Fast Food Industry," Harvard Institute of Economic Research Working Papers 1584, Harvard - Institute of Economic Research.
    Other versions:
  2. Kiefer, Nicholas M & Neumann, George R, 1979. "An Empirical Job-Search Model, with a Test of the Constant Reservation-Wage Hypothesis," Journal of Political Economy, University of Chicago Press, vol. 87(1), pages 89-107, February. [Downloadable!] (restricted)
  3. Deacon, Robert T & Sonstelie, Jon, 1989. "The Welfare Costs of Rationing by Waiting," Economic Inquiry, Oxford University Press, vol. 27(2), pages 179-96, April.
  4. repec:fth:prinin:298 is not listed on IDEAS
  5. repec:fth:prinin:300 is not listed on IDEAS
  6. Holzer, Harry J & Katz, Lawrence F & Krueger, Alan B, 1991. "Job Queues and Wages," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 739-68, August. [Downloadable!] (restricted)
  7. Linneman, Peter, 1982. "The Economic Impacts of Minimum Wage Laws: A New Look at an Old Question," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 443-69, June. [Downloadable!] (restricted)
  8. Abowd, John M & Kramarz, Francis & Margolis, David N, 1999. "Minimum Wages and Employment in France and the United States," CEPR Discussion Papers 2159, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Jones, Stephen R G, 1989. "Reservation Wages and the Cost of Unemployment," Economica, London School of Economics and Political Science, vol. 56(222), pages 225-46, May. [Downloadable!] (restricted)
  10. Edward L. Glaeser & Erzo F. P. Luttmer, 2003. "The Misallocation of Housing under Rent Control," American Economic Review, American Economic Association, vol. 93(4), pages 1027-1046, September. [Downloadable!] (restricted)
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  11. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," NBER Working Papers 4058, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Barzel, Yoram, 1974. "A Theory of Rationing by Waiting," Journal of Law & Economics, University of Chicago Press, vol. 17(1), pages 73-95, April.
  13. John M. Abowd & Francis Kramarz & Thomas Lemieux & David N. Margolis, 1997. "Minimum Wages and Youth Employment in France and the United States," NBER Working Papers 6111, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," Working Papers 680, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  15. Davis, Lucas W & Kilian, Lutz, 2007. "The Allocative Cost of Price Ceilings: Lessons to be Learned from the US Residential Market for Natural Gas," CEPR Discussion Papers 6142, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  16. Suen, Wing, 1989. "Rationing and Rent Dissipation in the Presence of Heterogeneous Individuals," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1384-94, December. [Downloadable!] (restricted)
  17. Palda, Filip, 2000. "Some deadweight losses from the minimum wage: the cases of full and partial compliance," Labour Economics, Elsevier, vol. 7(6), pages 751-783, November. [Downloadable!] (restricted)
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  18. David Neumark & William Wascher, 2007. "Minimum Wages and Employment," IZA Discussion Papers 2570, Institute for the Study of Labor (IZA). [Downloadable!]
  19. David Card, 1992. "Using regional variation in wages to measure the effects of the federal minimum wage," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 46(1), pages 22-37, October.
  20. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-93, September. [Downloadable!] (restricted)
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  21. Martin Feldstein & James M. Poterba, 1984. "Unemployment Insurance and Reservation Wages," NBER Working Papers 1011, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  22. Frech, H E, III & Lee, William C, 1987. "The Welfare Cost of Rationing-by-Queuing across Markets: Theory and Estimates from the U.S. Gasoline Crises," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 97-108, February. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Lucas W. Davis & Lutz Kilian, 2008. "The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas," NBER Working Papers 14030, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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