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Interpreting minimum wage effects on wage distribution: a cautionary tale

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  • Christopher J. Flinn

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Abstract

It is often tempting to attempt to infer the welfare of minimum wage changes from empirical observations on pre- and post-change employment and unemployment levels and wage or earnings distributions. Using a simple model of search, matching, and bargaining, we characterize the relationship between minimum wage levels, labor market outcomes, and the welfare of labor market participants. Using observations on wage distributions before and after changes in the nominal minimum wage, we determine what can and cannot be learned about welfare impacts from changes in various features of these distributions. Our results are illustrated using simulation exercises and a small empirical examples. Using U.S. data for young labor market participants in March 1997 and March 1998, we conclude that the increase in the minimum wage which occurred in September 1997 may have been welfare-enhancing, hough various implications of the model are not consistent with the data. This analysis illustrates the fact that well-specified behavioral models are required to evaluate the impact of changes in institutional constraints on welfare of labor market participants.

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File URL: http://www.icer.it/docs/wp2000/Flinn52000.pdf
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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 05-2000.

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Length: 46 pages
Date of creation: Mar 2000
Date of revision: May 2000
Handle: RePEc:icr:wpicer:05-2000

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Keywords: Minimum wages; Policy Evaluation; Bargaining Models; Wage Distribution;

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References

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  1. Janet Currie & Bruce C. Fallick, 1996. "The Minimum Wage and the Employment of Youth Evidence from the NLSY," Journal of Human Resources, University of Wisconsin Press, vol. 31(2), pages 404-428.
  2. Meyer, Robert H & Wise, David A, 1983. "Discontinuous Distributions and Missing Persons: The Minimum Wage and Unemployed Youth," Econometrica, Econometric Society, vol. 51(6), pages 1677-98, November.
  3. Bontemps, Christian & Robin, Jean-Marc & van den Berg, Gerard J, 2000. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Nonparametric Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 305-58, May.
  4. Flinn, Christopher J, 1986. "Wages and Job Mobility of Young Workers," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S88-S110, June.
  5. Linneman, Peter, 1982. "The Economic Impacts of Minimum Wage Laws: A New Look at an Old Question," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 443-69, June.
  6. Dickens, Richard & Machin, Stephen & Manning, Alan, 1998. "Estimating the effect of minimum wages on employment from the distribution of wages: A critical view," Labour Economics, Elsevier, vol. 5(2), pages 109-134, June.
  7. Flinn, C. & Heckman, J., 1982. "New methods for analyzing structural models of labor force dynamics," Journal of Econometrics, Elsevier, vol. 18(1), pages 115-168, January.
  8. Flinn, Christopher J., 1991. "Equilibrium Wage and Dismissal Processes," Working Papers 91-15, C.V. Starr Center for Applied Economics, New York University.
  9. Bontemps, Christian & Robin, Jean-Marc & Van den Berg, Gerard J, 1999. "An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1039-74, November.
  10. Meyer, Robert H & Wise, David A, 1983. "The Effects of the Minimum Wage on the Employment and Earnings of Youth," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 66-100, January.
  11. Neumark, David & Wascher, William, 1995. "Minimum-Wage Effects on School and Work Transitions of Teenagers," American Economic Review, American Economic Association, vol. 85(2), pages 244-49, May.
  12. Dale T. Mortensen, 1988. "Equilibrium Wage Distrihutions: A Synthesis," Discussion Papers 811, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. 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.
  14. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA).
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Cited by:
  1. Flabbi, Luca, 2010. "Prejudice and gender differentials in the US labor market in the last twenty years," Journal of Econometrics, Elsevier, vol. 156(1), pages 190-200, May.

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