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Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining

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  • Flinn, Christopher

    ()
    (New York University)

Abstract

Building upon a continuous-time model of search with Nash bargaining in a stationary environment, we analyze the effect of changes in minimum wages on labor market outcomes and welfare. While minimum wage increases invariably lead to employment losses in our model, they may be welfare-improving to labor market participants using any one of a number of welfare criteria. A key determinant of the welfare impact of a minimum wage increase is the Nash bargaining power parameter. We discuss identification of this model using Current Population Survey data on accepted wages and unemployment durations, and demonstrate that key parameters are not identified when the distribution of match values belongs to a location-scale family. By incorporating a limited amount of information from the demand side of the market, we are able to obtain credible and precise estimates of all primitive parameters, including bargaining power. Direct estimates of the welfare impact of the minimum wage increase from $4.25 to $4.75 in 1996 provide limited evidence of a small improvement. Using estimates of the primitive parameters we show that more substantial welfare gains for labor market participants could have been obtained by doubling the minimum wage rate in 1996, though at the cost of a perhaps unacceptably high unemployment rate.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 949.

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Length: 60 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:iza:izadps:dp949

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Keywords: minimum wages; matching models; Nash bargaining;

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References

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  1. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 252, David K. Levine.
  2. Lang, Kevin, 1987. "Pareto Improving Minimum Wage Laws," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 145-58, January.
  3. David Neumark & William Wascher, 1992. "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
  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. Pierre Cahuc & Fabien Postel-Vinay & Jean-Marc Robin, 2006. "Wage bargaining with on-the-job search: theory and evidence," Working Papers 150201, Institut National de la Recherche Agronomique, France.
  6. 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.).
  7. Matthew S. Dey & Christopher J. Flinn, 2005. "An Equilibrium Model of Health Insurance Provision and Wage Determination," Econometrica, Econometric Society, vol. 73(2), pages 571-627, 03.
  8. Alan Manning, 1994. "How do we Know that Real Wages are Too High?," CEP Discussion Papers dp0195, Centre for Economic Performance, LSE.
  9. 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.
  10. Swinnerton, Kenneth A, 1996. "Minimum Wages in an Equilibrium Search Model with Diminishing Returns to Labor in Production," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 340-55, April.
  11. Richard Dickens & Stephen Machin & Alan Manning, 1994. "Estimating the effect of minimum wages on employment from the distribution of wages: a critical view," LSE Research Online Documents on Economics 51648, London School of Economics and Political Science, LSE Library.
  12. Eckstein, Z. & Wolpin, K.I., 1995. "Estimating the Effect of Labor Market Discrimination on Black-White Differences in Wage Offers Using a Search- Matching-Bargaining Model," Papers 24-95, Tel Aviv - the Sackler Institute of Economic Studies.
  13. Flinn, Christopher J, 1997. "Equilibrium Wage and Dismissal Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 221-36, April.
  14. Robert H. Meyer & David A. Wise, 1982. "The Effects of the Minimum Wage on the Employment and Earnings of Youth," NBER Working Papers 0849, National Bureau of Economic Research, Inc.
  15. 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.
  16. Kooreman, P. & Kapteyn, A.J., 1990. "On the empirical implementation of some game theoretic models of household labor supply," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364364, Tilburg University.
  17. Rebitzer, James B. & Taylor, Lowell J., 1995. "The consequences of minimum wage laws Some new theoretical ideas," Journal of Public Economics, Elsevier, vol. 56(2), pages 245-255, February.
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