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Labour market outcomes of minimum wage changes: A behavioural perspective

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  • Wang, Tong

Abstract

The minimum wage has long been central to labour market policy debates. This paper develops a unified theoretical framework to assess the multifaceted effects of minimum wage hikes on employment, wages, effort, labour productivity, and firms’ profits. The model introduces two key channels: a conventional wage channel, where increased compensation for unskilled workers reduces labour demand, and a novel effort channel, where higher effort and productivity in response to perceived employer generosity mitigate job loss. In equilibrium, firms offer wage premiums above the minimum wage to incentivise effort, with spillovers to higher wages through workers’ fairness considerations. The own-wage employment elasticity for unskilled workers is about −0.026, indicating mild disemployment effects. Moreover, this elasticity shows weak dependence on the business cycle. The framework highlights critical interactions across multiple margins, offering comprehensive insights into the broader impacts of minimum wage policy.

Suggested Citation

  • Wang, Tong, 2025. "Labour market outcomes of minimum wage changes: A behavioural perspective," Labour Economics, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:labeco:v:97:y:2025:i:c:s0927537125001484
    DOI: 10.1016/j.labeco.2025.102824
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    Keywords

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    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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