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The Distributional Impacts of Minimum Wage Increases When Both Labor Supply and Labor Demand Are Endogenous

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  • Ahn, Tom
  • Arcidiacono, Peter
  • Wessels, Walter

Abstract

We develop and estimate a one-shot search model with endogenous firm entry, and therefore zero expected profits, and endogenous labor supply. Positive employment effects from a minimum wage increase can result as the employment level depends upon both the numbers of searching firms and workers. Welfare implications are similar to the classical analysis: workers who most want the minimum wage jobs are hurt by the minimum wage hike with workers marginally interested in minimum wage jobs benefiting. We estimate the model using CPS data on teenagers and show that small changes in the employment level are masking large changes in labor supply and demand. Teenagers from well-educated families see increases in their employment probabilities and push out their less-privileged counterparts from the labor market. This article has supplementary material online.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 29 (2011)
Issue (Month): 1 ()
Pages: 12-23

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Handle: RePEc:bes:jnlbes:v:29:i:1:y:2011:p:12-23

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Blog mentions

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  1. Unemployment and the Minimum Wage
    by Don Boudreaux in Cafe Hayek on 2013-09-18 15:56:24
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Cited by:
  1. Luca Flabbi and James Mabli, 2012. "Household Search or Individual Search: Does It Matter? Evidence from Lifetime Inequality Estimates," Working Papers gueconwpa~12-12-03, Georgetown University, Department of Economics.
  2. Isaac Sorkin, . "Are There Long-Run Effects of the Minimum Wage?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
  3. Ahn, Tom, 2011. "Distributional impacts of a local living wage increase with ability sorting," Economics Letters, Elsevier, vol. 112(3), pages 283-286, September.
  4. Nicole Coomer & Walter Wessels, 2013. "The Effect of the Minimum Wage on Covered Teenage Employment," Journal of Labor Research, Springer, vol. 34(3), pages 253-280, September.

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