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Does the Minimum Wage Cause Inefficient Rationing?

  • Luttmer Erzo F.P.

    ()

    (Harvard University)

By not allowing wages to clear the labor market, the minimum wage could cause workers with low reservation wages to be rationed out while equally skilled workers with higher reservation wages are employed. This paper exploits overlapping CPS panels to more precisely identify those most affected by the minimum wage, a group I refer to as the "unskilled." I test for inefficient rationing by examining whether the reservation wages of employed unskilled workers in states where the 1990-1991 federal minimum wage increase had the largest impact rose relative to reservation wages of unskilled workers in other states. I find that proxies for reservation wages of unskilled workers in high-impact states did not rise relative to reservation wages in other states, suggesting that the increase in the minimum wage did not cause jobs to be allocated less efficiently. However, even if rationing is efficient, the minimum wage can still entail other efficiency costs (e.g., from employment reductions).

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 7 (2007)
Issue (Month): 1 (October)
Pages: 1-42

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Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:49
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