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Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox

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  • Teulings, Coen N

Abstract

While the employment effects of minimum wages are usually reported to be small (suggesting low substitutability between skill types), direct estimates suggest a much larger degree of substitutability. This article argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories. An assignment model is applied where skilled workers have a comparative advantage in complex jobs. The implied pattern of substitutability reveals the sources of the bias. Estimation results for the United States show elasticities of complementarity to be underestimated by up to a factor 2.5. The methods laid out likewise can be applied to other markets where different quality types are close substitutes, such as the housing market. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 41 (2000)
Issue (Month): 2 (May)
Pages: 359-98

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Handle: RePEc:ier:iecrev:v:41:y:2000:i:2:p:359-98

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References

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  1. Coen N. Teulings, 2003. "The contribution of minimum wages to increasing wage inequality," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(490), pages 801-833, October.
  2. 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.
  3. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
  4. Chang, Yang-Ming & Ehrlich, Isaac, 1985. "On the Economics of Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 93(1), pages 84-91, February.
  5. David Card & Thomas Lemieux, 1993. "Wage Dispersion, Returns to Skill, and Black-White Wage Differentials," Working Papers 691, Princeton University, Department of Economics, Industrial Relations Section..
  6. John M. Abowd & Richard B. Freeman, 1991. "Immigration, Trade and the Labor Market," NBER Books, National Bureau of Economic Research, Inc, number abow91-1, October.
  7. Joseph G. Altonji & David Card, 1989. "The Effects of Immigration on the Labor Market Outcomes of Natives," NBER Working Papers 3123, National Bureau of Economic Research, Inc.
  8. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
  9. Meyer, Robert H & Wise, David A, 1983. "The Effects of the Minimum Wage on the Employment and Earnings of Youth," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 1(1), pages 66-100, January.
  10. Richard B. Freeman, 1982. "Crime and the Labor Market," NBER Working Papers 1031, National Bureau of Economic Research, Inc.
  11. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 410-42, June.
  12. Murphy, Kevin M & Welch, Finis, 1990. "Empirical Age-Earnings Profiles," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 8(2), pages 202-29, April.
  13. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  14. Sattinger, Michael, 1975. "Comparative Advantage and the Distributions of Earnings and Abilities," Econometrica, Econometric Society, Econometric Society, vol. 43(3), pages 455-68, May.
  15. Topel, Robert H, 1994. "Regional Labor Markets and the Determinants of Wage Inequality," American Economic Review, American Economic Association, vol. 84(2), pages 17-22, May.
  16. Robert H. Meyer & David A. Wise, 1981. "Discontinuous Distributions and Missing Persons: The Minimum Wage and Unemployed Youth," NBER Working Papers 0711, National Bureau of Economic Research, Inc.
  17. MacDonald, Glenn M, 1982. "Information in Production," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1143-62, September.
  18. Teulings, Coen N, 1995. "The Wage Distribution in a Model of the Assignment of Skills to Jobs," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(2), pages 280-315, April.
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Citations

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Cited by:
  1. Rafael Lopes de Melo, 2012. "Firm Heterogeneity, Sorting and the Minimum Wage," 2012 Meeting Papers, Society for Economic Dynamics 611, Society for Economic Dynamics.
  2. Gersbach, Hans & Schmutzler, Armin, 2005. "The Effects of Globalization on Worker Training," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4879, C.E.P.R. Discussion Papers.
  3. Robert A.J. Dur & Coen N. Teulings, 2003. "Are Education Subsidies an Efficient Redistributive Device?," Tinbergen Institute Discussion Papers 03-024/3, Tinbergen Institute, revised 19 Sep 2003.
  4. Maarten Goos & Alan Manning, 2003. "Lousy and Lovely Jobs: the Rising Polarization of Work in Britain," CEP Discussion Papers dp0604, Centre for Economic Performance, LSE.
  5. repec:spo:wpecon:info:hdl:2441/53r60a8s3kup1vc9je5h30d2n is not listed on IDEAS
  6. Melchor Fernández & Alberto Meixide & Hipólito J. Simón, . "El trabajo de bajos salarios en España," Studies on the Spanish Economy 152, FEDEA.
  7. Branimir Jovanovic, 2013. "Aggregation Bias in Trade Elasticities: The Case of Macedonia," FIW Working Paper series, FIW 106, FIW.
  8. Robert A. J. Dur & Coenraad N. Teulings, 2001. "Education and Efficient Redistribution," CESifo Working Paper Series 592, CESifo Group Munich.
  9. Coen N. Teulings, 1998. "The Contribution of Minimum Wages to Increasing Wage Inequality," Tinbergen Institute Discussion Papers 98-093/3, Tinbergen Institute.
  10. Coen N. Teulings, 1999. "Substitution and Complementarity under Comparative Advantage and the Accumulation of Human Capital," Tinbergen Institute Discussion Papers 99-049/3, Tinbergen Institute.
  11. Pauline Givord, 2011. "Essay on Four Issues in Public Policy Evaluation," Sciences Po publications info:hdl:2441/53r60a8s3ku, Sciences Po.
  12. repec:dgr:uvatin:2001090 is not listed on IDEAS
  13. Anna Lukiyanova, 2011. "Effects of Minimum Wages on the Russian Wage Distribution," HSE Working papers, National Research University Higher School of Economics WP BRP 09/EC/2011, National Research University Higher School of Economics.
  14. repec:dgr:uvatin:2003024 is not listed on IDEAS
  15. Pia Rattenhuber, 2014. "Building the minimum wage: the distributional impact of Germany’s first sectoral minimum wage on wages and hours across different wage bargaining regimes," Empirical Economics, Springer, Springer, vol. 46(4), pages 1429-1446, June.
  16. Aart Gerritsen & Bas Jacobs, 2014. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," CESifo Working Paper Series 4588, CESifo Group Munich.
  17. Joop Hartog, 2002. "Desperately Seeking Structure: Sherwin Rosen (1938--2001)," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(483), pages 519-531, November.

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