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Interpreting Minimum Wage Effects on Wage Distributions: A Cautionary Tale

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C. J. Flinn

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Abstract

It is tempting to try to infer the welfare effects 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, I 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, I determine what can and cannot be learned about welfare impacts from changes in various features of these distributions. Results are illustrated using simulation exercises and a small empirical example. Using U.S. data for young labor market participants in March 1997 and March 1998, this study concludes that the increase in the minimum wage which occurred in September 1997 may have been welfare-enhancing, though 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 the welfare of labor market participants.

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Paper provided by University of Wisconsin Institute for Research on Poverty in its series Institute for Research on Poverty Discussion Papers with number 1214-00.

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Handle: RePEc:wop:wispod:1214-00

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  1. 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. [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)
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  3. 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. [Downloadable!] (restricted)
  4. Flinn, Christopher J., 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA). [Downloadable!]
  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. [Downloadable!] (restricted)
  6. James J. Heckman & Christopher J. Flinn, 1982. "New Methods for Analyzing Structural Models of Labor Force Dynamics," NBER Working Papers 0856, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Flinn, Christopher J, 1997. "Equilibrium Wage and Dismissal Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 221-36, April.
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  8. 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. [Downloadable!] (restricted)
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  9. 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.
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  10. Janet Currie & Bruce Fallick, 1993. "The Minimum Wage and the Employment of Youth: Evidence from the NLSY," NBER Working Papers 4348, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Dale T. Mortensen, 1988. "Equilibrium Wage Distrihutions: A Synthesis," Discussion Papers 811, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  12. 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.
  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.
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  1. Zvi Eckstein & Suqin Ge & Barbara Petrongolo, 2006. "Job and Wage Mobility in a Search Model with Non-Compliance (Exemptions) with the Minimum Wage," IZA Discussion Papers 2076, Institute for the Study of Labor (IZA). [Downloadable!]
  2. Luca Flabbi, 2007. "Prejudice and Gender Differentials in the U.S. Labor Market in the Last Twenty Years," Carlo Alberto Notebooks 57, Collegio Carlo Alberto. [Downloadable!]
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  3. Coen N. Teulings, 1998. "The Contribution of Minimum Wages to Increasing Wage Inequality," Tinbergen Institute Discussion Papers 98-093/3, Tinbergen Institute. [Downloadable!]
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  4. Flinn, Christopher J., 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA). [Downloadable!]
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