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Some Deadweight Losses from the Minimum Wage: The Cases of Full and Partial Compliance

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Author Info

  • Filip Palda

    (Ecole nationale d'administration publique in Montreal)

Abstract

This paper highlights the social costs from non-price rationing of the labour force due to the minimum wage. By short-circuiting the ability of low reservation-wage workers to underbid high-reservation wage workers, the minimum wage interferes with the market's basic function of grouping the lowest cost workers with the highest productivity firms. The present paper models the deadweight loss that society bears when high reservation-cost workers displace low reservation-cost workers. When firms can evade part or all of the minimum wage, an extra deadweight loss arises. Firms with high evasive ability but low productivity may displace firms with low evasive ability but high productivity.

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File URL: http://128.118.178.162/eps/lab/papers/0112/0112001.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Labor and Demography with number 0112001.

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Length: 39 pages
Date of creation: 07 Dec 2001
Date of revision:
Handle: RePEc:wpa:wuwpla:0112001

Note: Type of Document - PDF; prepared on IBM PC; to print on HP/PostScript; pages: 39; figures: included/request from author/draw your own. PDF document may be viewed or printed
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Web page: http://128.118.178.162

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Keywords: Minimum wage; informal sector; deadweight loss;

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  1. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  2. Grenier, Gilles, 1982. "On Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 184-87, February.
  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. Ashenfelter, Orley & Smith, Robert S, 1979. "Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 87(2), pages 333-50, April.
  5. Rauch, James E., 1991. "Modelling the informal sector formally," Journal of Development Economics, Elsevier, vol. 35(1), pages 33-47, January.
  6. repec:fth:prinin:298 is not listed on IDEAS
  7. Lawrence F. Katz & Alan B. Krueger, 1992. "The effect of the minimum wage on the fast-food industry," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 6-21, October.
  8. Fortin, Bernard & Marceau, Nicolas & Savard, Luc, 1997. "Taxation, wage controls and the informal sector," Journal of Public Economics, Elsevier, vol. 66(2), pages 293-312, November.
  9. Kim, Jae-Cheol & Yoo, Byung-Kook, 1989. "Partial Compliance with the Minimum Wage Law," Bulletin of Economic Research, Wiley Blackwell, vol. 41(3), pages 197-206, July.
  10. Chang, Yang-Ming & Ehrlich, Isaac, 1985. "On the Economics of Compliance with the Minimum Wage Law," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 84-91, February.
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Cited by:
  1. Bulow, Jeremy & Klemperer, Paul, 2011. "Price Controls and Consumer Surplus," Research Papers 2086, Stanford University, Graduate School of Business.
  2. Erzo F.P. Luttmer, 2007. "Does the Minimum Wage Cause Inefficient Rationing?," NBER Working Papers 13012, National Bureau of Economic Research, Inc.
  3. Jeremy Bulow & Paul Klemperer, 2012. "Regulated Prices, Rent-Seeking, and Consumer Surplus," Economics Papers 2012-W03, Economics Group, Nuffield College, University of Oxford.
  4. Aart Gerritsen & Bas Jacobs, 2014. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," CESifo Working Paper Series 4588, CESifo Group Munich.

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