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Minimum wages and training

Author

Listed:
  • Lechthaler, Wolfgang
  • Snower, Dennis J.

Abstract

The paper analyzes the influence of minimum wages on firms' incentive to train their employees. We show that this influence rests on two countervailing effects: minimum wages (i) augment wage compression and thereby raise firms' incentives to train and (ii) reduce the profitability of employees, raise the firing rate and thereby reduce training. Our analysis shows that the relative strength of these two effects depends on the employees' ability levels. Our striking result is that minimum wages give rise to skills inequality: a rise in the minimum wage leads to less training for low-ability workers and more training for those of higher ability. In short, minimum wages create a "low-skill trap." We indicate that this effect may be important empirically. Finally, including workers' incentives to train themselves makes no major difference to our results.

Suggested Citation

  • Lechthaler, Wolfgang & Snower, Dennis J., 2008. "Minimum wages and training," Labour Economics, Elsevier, vol. 15(6), pages 1223-1237, December.
  • Handle: RePEc:eee:labeco:v:15:y:2008:i:6:p:1223-1237
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    References listed on IDEAS

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    1. Mortensen, Dale & Pissarides, Christopher, 2011. "Job Creation and Job Destruction in the Theory of Unemployment," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 1-19.
    2. Loewenstein, Mark A & Spletzer, James R, 1998. "Dividing the Costs and Returns to General Training," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 142-171, January.
    3. Daron Acemoglu & Jorn-Steffen Pischke, 1999. "The Structure of Wages and Investment in General Training," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 539-572, June.
    4. Stéphane Carcillo & Etienne Wasmer, 2003. "Bilateral Worker-Firm Training Decisions and an Application to Discrimination," Annals of Economics and Statistics, GENES, issue 71-72, pages 293-315.
    5. Neumark, David & Wascher, William, 2001. "Minimum Wages and Training Revisited," Journal of Labor Economics, University of Chicago Press, vol. 19(3), pages 563-595, July.
    6. Adam J. Grossberg & Paul Sicilian, 1999. "Minimum Wages, On-the-Job Training, and Wage Growth," Southern Economic Journal, Southern Economic Association, vol. 65(3), pages 539-556, January.
    7. repec:adr:anecst:y:2003:i:71-72:p:12 is not listed on IDEAS
    8. David S. Lee, 1999. "Wage Inequality in the United States During the 1980s: Rising Dispersion or Falling Minimum Wage?," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 977-1023.
    9. Ralf A. Wilke, 2005. "New Extimates of the Duration and Risk of Unemployment for West-Germany," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 125(2), pages 207-237.
    10. repec:spo:wpecon:info:hdl:2441/8941 is not listed on IDEAS
    11. repec:adr:anecst:y:2033:i:71-72 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Moretti, Luca & Mayerl, Martin & Mühlemann, Samuel & Schlögl, Peter & Wolter, Stefan C., 2017. "So Similar and Yet So Different: A Comparative Analysis of a Firm's Cost and Benefits of Apprenticeship Training in Austria and Switzerland," IZA Discussion Papers 11081, Institute for the Study of Labor (IZA).
    2. Boss, Alfred & Dovern, Jonas & Meier, Carsten-Patrick & Oskamp, Frank & Scheide, Joachim, 2008. "Deutschland: Robuste Binnenkonjunktur - Dämpfer aus dem Ausland," Open Access Publications from Kiel Institute for the World Economy 4306, Kiel Institute for the World Economy (IfW).
    3. repec:eee:labeco:v:47:y:2017:i:c:p:149-162 is not listed on IDEAS
    4. HARA Hiromi, 2015. "The Effects of Minimum Wages on Training," Discussion papers 15075, Research Institute of Economy, Trade and Industry (RIETI).
    5. repec:spr:izalbr:v:6:y:2017:i:1:d:10.1186_s40172-017-0058-z is not listed on IDEAS
    6. Katalin Bodnár & Ludmila Fadejeva & Stefania Iordache & Liina Malk & Desislava Paskaleva & Jurga Pesliakaite & Nataša Todorovic Jemec & Peter Tóth & Robert Wyszynski, 2017. "How do firms adjust to rises in the minimum wage? Survey evidence from Central and Eastern Europe," Working and Discussion Papers WP 9/2017, Research Department, National Bank of Slovakia.
    7. repec:eee:labeco:v:47:y:2017:i:c:p:163-181 is not listed on IDEAS

    More about this item

    Keywords

    J24 J31 Minimum Wage Firm Training Skills Inequality;

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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