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Interpreting Minimum Wage Effects on Wage Distributions: A Cautionary Tale

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  • C. J. Flinn

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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  • C. J. Flinn, "undated". "Interpreting Minimum Wage Effects on Wage Distributions: A Cautionary Tale," Institute for Research on Poverty Discussion Papers 1214-00, University of Wisconsin Institute for Research on Poverty.
    • Handle: RePEc:wop:wispod:1214-00
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    1. 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 305-358, May.
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    5. 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 1039-1074, November.
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    8. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute of Labor Economics (IZA).
    9. 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 443-469, June.
    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.
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    Cited by:

    1. Eckstein, Zvi & Ge, Suqin & Petrongolo, Barbara, 2006. "Job and Wage Mobility in a Search Model with Non-Compliance (Exemptions) with the Minimum Wage," IZA Discussion Papers 2076, Institute of Labor Economics (IZA).
    2. 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.
    3. James Mabli & Christopher Flinn, 2007. "On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework," 2007 Meeting Papers 791, Society for Economic Dynamics.
    4. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute of Labor Economics (IZA).
    5. Doruk Cengiz & Arindrajit Dube & Attila S. Lindner & David Zentler-Munro, 2021. "Seeing Beyond the Trees: Using Machine Learning to Estimate the Impact of Minimum Wages on Labor Market Outcomes," NBER Working Papers 28399, National Bureau of Economic Research, Inc.
    6. Malul Miki & Luski Israel, 2009. "The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-24, November.
    7. Mueller, Kai-Uwe & Steiner, Viktor, 2013. "Behavioral effects of a federal minimum wage and income inequality in Germany," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79784, Verein für Socialpolitik / German Economic Association.

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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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