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Spillover Effects of Minimum Wages: Theory and Experimental Evidence

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  • Marcus Dittrich
  • Andreas Knabe
  • Kristina Leipold

Abstract

We study the spillover effects of minimum wages in a laboratory experiment. In a bilateral firm-worker bargaining setting, we find that the introduction of a minimum wage exerts upward pressure on wages even if the minimum wage is too low to be a binding restriction. Furthermore, raising the minimum wage to a binding level increases the bargained wage above the new minimum wage level. While the Nash solution cannot explain the existence of spillover effects, the Kalai-Smorodinsky solution yields results that are qualitatively more in line with our experimental findings.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3576.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3576

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Related research

Keywords: minimum wage; bargaining; Kalai-Smorodinsky solution; labor market experiments;

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References

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  1. Dinardo, J. & Fortin, N.M. & Lemieux, T., 1994. "Labor Market Institutions and the Distribution of Wages, 1973-1992: a Semiparametric Approach," Cahiers de recherche 9406, Universite de Montreal, Departement de sciences economiques.
  2. Amartya Sen, 1997. "Maximization and the Act of Choice," Econometrica, Econometric Society, vol. 65(4), pages 745-780, July.
  3. Lawrence F. Katz & Alan B. Krueger, 1992. "The Effect of the Minimum Wage on the Fast Food Industry," NBER Working Papers 3997, National Bureau of Economic Research, Inc.
  4. Marcus Dittrich & Andreas Knabe, 2010. "Wage and Employment Effects of Non-Binding Minimum Wages," CESifo Working Paper Series 3149, CESifo Group Munich.
  5. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  6. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  7. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  8. Jean Baldwin Grossman, 1983. "The Impact of the Minimum Wage on Other Wages," Journal of Human Resources, University of Wisconsin Press, vol. 18(3), pages 359-378.
  9. Armin Falk & Ernst Fehr & Christian Zehnder, . "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
  10. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, 07.
  11. David Neumark & DMark Schweitzer & DaWilliam Wascher, 2004. "Minimum Wage Effects throughout the Wage Distribution," Journal of Human Resources, University of Wisconsin Press, vol. 39(2).
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Cited by:
  1. Marcus Dittrich & Andreas Knabe & Kristina Leipold, 2012. "Gender Differences in Experimental Wage Negotiations," CESifo Working Paper Series 3862, CESifo Group Munich.
  2. Michele Battisti, 2013. "High Wage Workers and High Wage Peers," Ifo Working Paper Series Ifo Working Paper No. 168, Ifo Institute for Economic Research at the University of Munich.

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