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The elasticity of labor demand and the minimum wage

  • Leif Danziger

    ()

We show that, contrary to widespread belief, low-pay workers do not generally prefer that the minimum wage rate be increased until the labor demand is unitary elastic. Rather, there exists a critical value of elasticity of labor demand so that increases in the minimum wage rate make low-pay workers better off for higher elasticities, but worse off for lower elasticities. This critical value decreases with unemployment benefits and increases with workers’ risk aversion. We also show that in some countries the benefits for long-term unemployed are so low that workers would probably prefer that the minimum wage rate be decreased.

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File URL: http://hdl.handle.net/10.1007/s00148-007-0179-y
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Article provided by Springer in its journal Journal of Population Economics.

Volume (Year): 22 (2009)
Issue (Month): 3 (July)
Pages: 757-772

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Handle: RePEc:spr:jopoec:v:22:y:2009:i:3:p:757-772
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  1. N. Gregory Mankiw, 1983. "Consumer Durables and the Real Interest Rate," NBER Working Papers 1148, National Bureau of Economic Research, Inc.
  2. Burkhauser, Richard V & Couch, Kenneth A & Wittenburg, David C, 2000. "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 653-80, October.
  3. Andrew Clark & Yannis Georgellis & Peter Sanfey, 1999. "Scarring: The Psychological Impact of Past Unemployment," Studies in Economics 9903, School of Economics, University of Kent.
  4. John T. Addison & McKinley L. Blackburn, 1999. "Minimum wages and poverty," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 52(3), pages 393-409, April.
  5. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December.
  6. Alan B. Krueger & David Card, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply," American Economic Review, American Economic Association, vol. 90(5), pages 1397-1420, December.
  7. Barsky, Robert B, et al, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 537-79, May.
  8. Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1995. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
  9. Richard Dickens & Stephen Machin & Alan Manning, 1994. "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain," CEP Discussion Papers dp0183, Centre for Economic Performance, LSE.
  10. David Neumark & William Wascher, 1992. "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
  11. Russell S. Sobel, 1999. "Theory and Evidence on the Political Economy of the Minimum Wage," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 761-785, August.
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