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Efficiency Wages and the Economic Effects of the Minimum Wage: Evidence from a Low-Wage Labour Market

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  • Andreas Georgiadis
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    Abstract

    We exploit a natural experiment provided by the 1990 introduction of the UK National Minimum Wage (NMW) to investigate the relationship between wages and monitoring and to test for Efficiency Wages considerations in a low-wage sector, the UK residential care homes industry. Our findings seem to support the wage-supervision trade-off prediction of the shirking model, and that employers didn't dissipate minimum wage rents by increasing work intensity or effort requirements on the job. Estimation results suggest that higher wage costs were more than offset by lower monitoring costs, and thus the overall evidence imply that the NMW may have operated as an Efficiency Wage. These findings support Efficiency Wage models used to explain a non-negative employment effect of the Minimum Wage and provide an explanation of recent evidence from the care homes sector that although the wage structure was heavily affected by the NMW introduction, there were moderate employment effects.

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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0857.

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    Date of creation: Feb 2008
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    Handle: RePEc:cep:cepdps:dp0857

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

    Related research

    Keywords: Efficiency Wages; National Minimum Wage; Wage-supervision trade-off;

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    1. Christos Genakos & Tommaso Valletti, 2008. "Testing the “Waterbed” Effect in Mobile Telephony," CEIS Research Paper, Tor Vergata University, CEIS 110, Tor Vergata University, CEIS, revised 11 Jul 2008.
    2. L. Rachel Ngai & Christopher Pissarides, 2008. "Employment outcomes in the welfare state," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 3525, London School of Economics and Political Science, LSE Library.
    3. Yashiv, Eran, 2006. "U.S. Labor Market Dynamics Revisited," IZA Discussion Papers 2455, Institute for the Study of Labor (IZA).
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