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How do we Know that Real Wages are Too High?

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Author Info
Alan Manning

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Abstract

It is common belief that the wages that we observe are above the level that would prevail in a competitive labour market and also it is common to believe that wage moderation should be encouraged as a way to keep unemployment down. This paper considers whether we can have confidence in these beliefs. It presents a number of models designed to cast doubt on the conventional wisdom. First, we show that in an efficiency wage model in which there is involuntary unemployment, a binding minimum wage may increase employment. We then present a general equilibrium matching model in which there is involuntary unemployment but wages are below market-clearing levels and raising wages can reduce unemployment. We then consider the empirical evidence on employment and wage determination to argue that it is just as consistent with this model as with models in which wages are at or above market-clearing levels.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0195.

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Date of creation: May 1994
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Handle: RePEc:cep:cepdps:dp0195

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  1. Cahuc, Pierre & Laroque, Guy, 2007. "Optimal Taxation and Monopsonistic Labour Market: Does Monopsony Justify the Minimum Wage?," CEPR Discussion Papers 6416, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Dolado, Juan J. & Felgueroso, Florentino & Jimeno, Juan F., 2000. "The Role of the Minimum Wage in the Welfare State: An Appraisal," IZA Discussion Papers 152, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  3. Lawrence F. Katz, 1996. "Wage Subsidies for the Disadvantaged," NBER Working Papers 5679, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Frank Walsh, 2000. "Monopsony Power with Variable Effort," Working Papers 200023, School Of Economics, University College Dublin. [Downloadable!]
  5. Erling Barth & Claudio Lucifora, 2006. "Wage Dispersion, Markets and Institutions: The Effects of the Boom in Education on the Wage Structure," IZA Discussion Papers 2181, Institute for the Study of Labor (IZA). [Downloadable!]
  6. Shilov, Andrey & Tourovsky, Boris, 2008. "The minimum wage in the dominant firm model," IAB Discussion Paper 200823, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]. [Downloadable!]
  7. Flinn, Christopher J., 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA). [Downloadable!]
  8. Isabelle Méjean & Lise Patureau, 2008. "Location decisions and Minimum Wages," THEMA Working Papers 2008-06, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
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  9. Catherine Armington & Zoltan Acs, 2000. "Differences in Job Growth and Persistence in Services and Manufacturing," Working Papers 00-04, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  10. Daniel Aaronson & Eric French & James MacDonald, 2004. "The minimum wage and restaurant prices," Working Paper Series WP-04-21, Federal Reserve Bank of Chicago. [Downloadable!]
  11. Julie Beugnot, 2008. "The effects of a minimum wage increase in a model with multiple unemployment equilibria," Working Papers 08-16, LAMETA, Universtiy of Montpellier, revised Oct 2008. [Downloadable!]
  12. V. Bhaskar & Ted To, 1996. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Labor and Demography 9603001, EconWPA, revised 21 May 1996. [Downloadable!]
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  13. Kosali Ilayperuma Simon & Robert Kaestner, 2003. "Do Minimum Wages Affect Non-wage Job Attributes? Evidence on Fringe Benefits and Working Conditions," NBER Working Papers 9688, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Nicolas Bauduin & Joël Hellier, 2006. "Skill Dynamics, Inequality and Social Policies," Working Papers 34, ECINEQ, Society for the Study of Economic Inequality. [Downloadable!]
  15. Chung-cheng Lin, 2001. "A Comment on "Labor Markets, Unemployment, and Minimum Wages: A New View."," Eastern Economic Journal, Eastern Economic Association, vol. 27(1), pages 71-82, Winter. [Downloadable!]
  16. Kamila Fialová & Ondøej Schneider, 2008. "Labour Market Institutions and their Effect on Labour Market Performance in the New EU Member Countries," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  17. Armin Falk & Ernst Fehr & Christian Zehnder, 2005. "The Behavioral Effects of Minimum Wages," IZA Discussion Papers 1625, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  18. Jakob B. Madsen, Richard Damania, 2001. "Labour Demand and Wage-induced Innovations: evidence from the OECD countries," International Review of Applied Economics, Taylor and Francis Journals, vol. 15(3), pages 323-334, July. [Downloadable!] (restricted)
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