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Rational Expectations and the Puzzling No-Effect of the Minimum Wage

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  • Pinoli, Sara

    ()
    (Department of Economics)

Abstract

This paper argues that expectations are an important element that need to be included into the analysis of the effects of the minimum wage on employment. We show in a standard matching model that the observed employment e¤ect is higher the lower is the likelihood associated with the minimum wage variation. On the other side, there is a significant anticipation e¤ect, ignored in the literature. This property is able to explain the controversial results found in the empirical studies. When the policy is anticipated, the effect at the time of the actual variation is small and potentially hard to identify. The model is tested on Spanish data, taking advantage of the unexpected change in the minimum wage following the election of Zapatero in 2004.

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Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2010:10.

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Length: 56 pages
Date of creation: 17 Jun 2010
Date of revision:
Handle: RePEc:hhs:uunewp:2010_010

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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
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Web page: http://www.nek.uu.se/
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Keywords: Minimum wage; Expectations; Heterogeneous matches;

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References

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  1. Neumark, David & Wascher, William L., 2007. "Minimum Wages and Employment," Foundations and Trends(R) in Microeconomics, now publishers, vol. 3(1–2), pages 1-182, March.
  2. James B. Rebitzer & Lowell J. Taylor, 1991. "The Consequences of Minimum Wage Laws: Some New Theoretical Ideas," NBER Working Papers 3877, National Bureau of Economic Research, Inc.
  3. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, 07.
  4. Alan Manning, 2003. "The real thin theory: monopsony in modern labour markets," LSE Research Online Documents on Economics 20050, London School of Economics and Political Science, LSE Library.
  5. David Neumark & William Wascher, 1995. "Minimum wage effects on school and work transitions of teenagers," Finance and Economics Discussion Series 95-7, Board of Governors of the Federal Reserve System (U.S.).
  6. Robin Boadway & Katherine Cuff, 1999. "A Minimum Wage Can Be Welfare-Improving and Employment-Enhancing," Cahiers de recherche CREFE / CREFE Working Papers 72, CREFE, Université du Québec à Montréal.
  7. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027.
  8. Pedro Portugal & Ana Rute Cardoso, 2006. "Disentangling the Minimum Wage Puzzle: An Analysis of Worker Accessions and Separations," Journal of the European Economic Association, MIT Press, vol. 4(5), pages 988-1013, 09.
  9. Alan Manning, 2001. "Monopsony and the efficiency of labour market interventions," LSE Research Online Documents on Economics 20097, London School of Economics and Political Science, LSE Library.
  10. David Card, 1992. "Using regional variation in wages to measure the effects of the federal minimum wage," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 22-37, October.
  11. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December.
  12. repec:fth:prinin:300 is not listed on IDEAS
  13. 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.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Expectations and the employment effect of minimum wages
    by Economic Logician in Economic Logic on 2010-06-18 14:42:00
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Cited by:
  1. Allegretto, Sylvia & Dube, Arindrajit & Reich, Michael, 2010. "Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data," Institute for Research on Labor and Employment, Working Paper Series qt7jq2q3j8, Institute of Industrial Relations, UC Berkeley.
  2. Hanna Frings, 2012. "The Employment Effect of Industry-Specific, Collectively-Bargained Minimum Wages," Ruhr Economic Papers 0348, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.

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  1. Economic Logic blog

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