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The Behavioral Effects of Minimum Wages

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Author Info
Armin Falk
Ernst Fehr
Christian Zehnder

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Abstract

The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects’ reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects’ reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people’s behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

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Paper provided by Institute for Empirical Research in Economics - IEW in its series IEW - Working Papers with number iewwp247.

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Handle: RePEc:zur:iewwpx:247

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Keywords: Minimum wages labor market monopsony fairness reservation wages entitlement

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
J58 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Public Policy
J68 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Public Policy

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fehr, Ernst & Singer, Tania, 2005. "The Neuroconomics of Mind Reading and Empathy," CEPR Discussion Papers 5128, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Dirk Engelmann & Dorothea Kübler, 2008. "Do Legal Standards Affect Ethical Concerns of Consumers?," SFB 649 Discussion Papers SFB649DP2008-008, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  3. König, Marion & Möller, Joachim, 2007. "Mindestlohneffekte des Entsendegesetzes? : eine Mikrodatenanalyse für die deutsche Bauwirtschaft (Minimum wage effects of the worker posting law? : a micro data analysis for the German construction s," IAB Discussion Paper 200730, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany]. [Downloadable!]
  4. Falk, Armin & Fehr, Ernst & Zehnder, Christan, 2005. "The Behavioural Effects of Minimum Wages," CEPR Discussion Papers 5115, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundation of Trust and Social Preferences," CEPR Discussion Papers 5127, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Roberto Galbiati & Pietro Vertova, 2006. "The Hidden Effect of Rules: Behavioural consequences of Obligations," Discussion Papers 18_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy. [Downloadable!]
  7. Herwig Immervoll, 2007. "Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment," IZA Discussion Papers 2555, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  8. Böckerman, Petri & Uusitalo, Roope, 2007. "Minimum wages and youth employment: Evidence from the Finnish retail trade sector," MPRA Paper 6113, University Library of Munich, Germany. [Downloadable!]
  9. Markus Pannenberg, 2007. "Risk Aversion and Reservation Wages," IZA Discussion Papers 2806, Institute for the Study of Labor (IZA). [Downloadable!]
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