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When the minimum wage really bites hard: The negative spillover effect on high-skilled workers

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  • Gregory, Terry
  • Zierahn, Ulrich

Abstract

Minimum wage levels are rising around the globe. To shed more light on the possible unintended side effects of higher wage floors, we study the impact of a minimum wage introduction on wages and employment in a quasi-experimental setting where the minimum wage is set extraordinarily high during an economic downturn. We identify treatment effects along different wage and skill groups and find positive wage and employment spillover effects for medium-skilled workers with salaries just above the minimum wage. More striking, we find negative wage and employment effects for high-skilled workers who are further up the wage distribution, followed by reduced returns to skills and industry skill supply. We explain these adjustments with a substitution-scale model that predicts negative spillover effects whenever labor-labor substitutions toward high-skilled workers are overcompensated by an overall decline in industry employment. Even though we focus on a specialized industry, we lay out the general conditions under which such unfavorable adjustments may occur in other contexts.

Suggested Citation

  • Gregory, Terry & Zierahn, Ulrich, 2022. "When the minimum wage really bites hard: The negative spillover effect on high-skilled workers," Journal of Public Economics, Elsevier, vol. 206(C).
    • Handle: RePEc:eee:pubeco:v:206:y:2022:i:c:s0047272721002188
    DOI: 10.1016/j.jpubeco.2021.104582
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    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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