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What is the optimal minimum wage?

Author

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  • Teulings, Coen
  • Chen, Yujiang River

Abstract

The extensive literature on minimum wages has found evidence for the compression of relative wages and mixed results for employment. This literature has been plagued by a number of problems. First, the median-minimum wage ratio is used as the independent variable, where the median is endogenous. Second, it is difficult to disentangle compression of relative wages and truncation due to employment effects. Third, all effects are likely to depend on the initial level of the minimum. Fourth, employment effects are likely to differ between worker types. We offer solutions for these problems, by using instruments for the median, by using data on personal characteristics, and by using a flexible specification. We apply our method to US data starting from 1979, allowing for a wide variation in minimum wages. We find strong compression and positive employment effects for the lower half of the distribution, persisting for quite high levels of the minimum.

Suggested Citation

  • Teulings, Coen & Chen, Yujiang River, 2022. "What is the optimal minimum wage?," CEPR Discussion Papers 17026, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:17026
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    More about this item

    Keywords

    Minimum wages; Us; Employment effects; Wage dispersion; Wage share;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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