IDEAS home Printed from https://ideas.repec.org/a/kap/atlecj/v51y2023i2d10.1007_s11293-023-09780-x.html
   My bibliography  Save this article

The Minimum Wage and Natural Rate of Unemployment

Author

Listed:
  • Donald F. Vitaliano

    (Rensselaer Polytechnic Institute)

Abstract

The unemployment theory of Pissarides-Mortensen-Diamond is applied to the close-by geographic comparison identification strategy to analyze the effect of the minimum wage in New York State. The increase in the minimum wage in 2018 is estimated to raise the natural rate of unemployment almost 20 percent. The elasticity of the unemployment rate with respect to the minimum wage is 2.11 in New York City and 3.3 in the suburbs. To account for varying local labor market conditions, the minimum wage rise was phased in and geographically differentiated, which permits a within-state comparison. A labor market matching function and a Beveridge-type market tightness equation are estimated in an environment of low and falling unemployment rates, thus posing a strong natural experiment test of the hypothesis that the minimum wage causes negligible employment effects. It is estimated that the higher two of the three wage tiers caused a loss of about 39,000 jobs, which is in contrast to the dominant narrative of no effect when using the geographic comparison technique.

Suggested Citation

  • Donald F. Vitaliano, 2023. "The Minimum Wage and Natural Rate of Unemployment," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 51(2), pages 189-202, September.
    • Handle: RePEc:kap:atlecj:v:51:y:2023:i:2:d:10.1007_s11293-023-09780-x
    DOI: 10.1007/s11293-023-09780-x
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11293-023-09780-x
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11293-023-09780-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    2. Harry J. Holzer, 1986. "Reservation Wages and Their Labor Market Effects for Black and White Male Youth," Journal of Human Resources, University of Wisconsin Press, vol. 21(2), pages 157-177.
    3. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-793, September.
    4. Neumark David, 2019. "The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns," German Economic Review, De Gruyter, vol. 20(3), pages 293-329, August.
    5. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    6. Feldstein, Martin & Poterba, James, 1984. "Unemployment insurance and reservation wages," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 141-167.
    7. Muehlemann, Samuel & Strupler Leiser, Mirjam, 2018. "Hiring costs and labor market tightness," Labour Economics, Elsevier, vol. 52(C), pages 122-131.
    8. Edmund S. Phelps, 1968. "Money-Wage Dynamics and Labor-Market Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 76(4), pages 678-678.
    9. Arghya Bhattacharya & Paul Jackson & Brian C. Jenkins, 2018. "Revisiting unemployment in intermediate macroeconomics: A new approach for teaching Diamond-Mortensen-Pissarides," The Journal of Economic Education, Taylor & Francis Journals, vol. 49(1), pages 22-37, January.
    10. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(2), pages 217-227.
    11. Arindrajit Dube & T. William Lester & Michael Reich, 2010. "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 945-964, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Isabel Cairó & Tomaz Cajner, 2018. "Human Capital and Unemployment Dynamics: Why More Educated Workers Enjoy Greater Employment Stability," Economic Journal, Royal Economic Society, vol. 128(609), pages 652-682, March.
    2. Lisi, Gaetano, 2013. "The Benchmark Macroeconomic Models of the Labour Market," MPRA Paper 62318, University Library of Munich, Germany.
    3. Lisi, Gaetano, 2011. "Matching Models of Equilibrium Unemployment: An Overview," MPRA Paper 30191, University Library of Munich, Germany.
    4. Schulz, Bastian, 2024. "Labor market dynamics with sorting," Journal of Economic Dynamics and Control, Elsevier, vol. 158(C).
    5. Marianna Kudlyak & Murat Tasci & Didem Tuzemen, 2019. "Minimum Wage Increases and Vacancies," Working Papers 19-30R, Federal Reserve Bank of Cleveland, revised 21 Apr 2022.
    6. Dromel, Nicolas L. & Kolakez, Elie & Lehmann, Etienne, 2010. "Credit constraints and the persistence of unemployment," Labour Economics, Elsevier, vol. 17(5), pages 823-834, October.
    7. Coen N. Teulings & Pieter A. Gautier, 2004. "The Right Man for the Job," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 553-580.
    8. Kory Kroft & Kavan Kucko & Etienne Lehmann & Johannes Schmieder, 2020. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," American Economic Journal: Economic Policy, American Economic Association, vol. 12(1), pages 254-292, February.
    9. Yashiv, Eran, 2007. "Labor search and matching in macroeconomics," European Economic Review, Elsevier, vol. 51(8), pages 1859-1895, November.
    10. Jofre-Monseny, Jordi & Silva, José I. & Vázquez-Grenno, Javier, 2020. "Local labor market effects of public employment," Regional Science and Urban Economics, Elsevier, vol. 82(C).
    11. Yashiv, Eran, 2006. "Evaluating the performance of the search and matching model," European Economic Review, Elsevier, vol. 50(4), pages 909-936, May.
    12. Sattinger, Michael, 2006. "Overlapping labour markets," Labour Economics, Elsevier, vol. 13(2), pages 237-257, April.
    13. Lastauskas, Povilas & Stakėnas, Julius, 2020. "Labor market reforms and the monetary policy environment," European Economic Review, Elsevier, vol. 128(C).
    14. Pissarides, Christopher & Mortensen, Dale T., 2001. "Taxes, Subsidies and Equilibrium Labour Market Outcomes," CEPR Discussion Papers 2989, C.E.P.R. Discussion Papers.
    15. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2018. "A Macroeconomic Approach to Optimal Unemployment Insurance: Theory," American Economic Journal: Economic Policy, American Economic Association, vol. 10(2), pages 152-181, May.
    16. Pascal Michaillat, 2023. "Modeling Migration-Induced Unemployment," Papers 2303.13319, arXiv.org, revised Dec 2024.
    17. Seok, Byoung Hoon & You, Hye Mi, 2022. "Macroeconomic impacts of increasing the minimum wage: The case of Korea," Economic Modelling, Elsevier, vol. 113(C).
    18. Gaetano Lisi & Maurizio Pugno, 2015. "A matching model of endogenous growth and underground firms," International Journal of Economic Theory, The International Society for Economic Theory, vol. 11(4), pages 347-369, December.
    19. Michaillat, Pascal, 2012. "A Theory of Countercyclical Government-Consumption Multiplier," CEPR Discussion Papers 9052, C.E.P.R. Discussion Papers.
    20. Holmlund, Bertil, 2014. "What do labor market institutions do?," Labour Economics, Elsevier, vol. 30(C), pages 62-69.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:atlecj:v:51:y:2023:i:2:d:10.1007_s11293-023-09780-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.