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Does the Minimum Wage Cause Inefficient Rationing?

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  • Luttmer Erzo F.P.

    ()
    (Harvard University)

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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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 7 (2007)
Issue (Month): 1 (October)
Pages: 1-42

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Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:49

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  1. 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.
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Citations

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Cited by:
  1. Bulow, Jeremy & Klemperer, Paul, 2011. "Price Controls and Consumer Surplus," Research Papers 2086, Stanford University, Graduate School of Business.
  2. 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.
  3. Aart Gerritsen & Bas Jacobs, 2014. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," CESifo Working Paper Series 4588, CESifo Group Munich.
  4. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
  5. Tommy Andersson & Zaifu Yang & Dongmo Zhang, 2014. "How to Efficiently Allocate Houses under Price Controls?," Discussion Papers 14/05, Department of Economics, University of York.
  6. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc.

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