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

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Author Info
Pinoli, Sara

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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 these effects are higher the lower is the likelihood associated to the minimum wage variation. This property also helps explaining the controversial results found in the empirical literature. When the policy is anticipated, the observed effect at the time of the actual variation is small and 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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File URL: http://mpra.ub.uni-muenchen.de/11405/
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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11405.

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Date of creation: 04 Oct 2008
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Handle: RePEc:pra:mprapa:11405

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Related research
Keywords: Minimum wage; Expectations; Heterogeneous matches;

Find related papers by JEL classification:
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!] (restricted)
  4. repec:fth:prinin:300 is not listed on IDEAS
  5. Alan Manning, 2003. "The Real Thin Theory: Monopsony in Modern Labour Markets," CEP Discussion Papers dp0564, Centre for Economic Performance, LSE. [Downloadable!]
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  6. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," Working Papers 680, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
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  7. Boadway, Robin & Cuff, Katherine, 2001. "A minimum wage can be welfare-improving and employment-enhancing," European Economic Review, Elsevier, vol. 45(3), pages 553-576, March. [Downloadable!] (restricted)
    Other versions:
  8. 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. [Downloadable!] (restricted)
  9. David Neumark & William L. Wascher, 2008. "Minimum Wages," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262141027, December.
  10. David Neumark & William Wascher, 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. [Downloadable!] (restricted)
  11. 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. [Downloadable!] (restricted)
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  12. David Neumark & William Wascher, 2007. "Minimum Wages and Employment," IZA Discussion Papers 2570, Institute for the Study of Labor (IZA). [Downloadable!]
  13. Manning, Alan, 2004. "Monopsony and the efficiency of labour market interventions," Labour Economics, Elsevier, vol. 11(2), pages 145-163, April. [Downloadable!] (restricted)
    Other versions:
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