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Interpreting Minimum Wage Effects on Wage Distributions: A Cautionary Tale

  • Flinn, C. J.

It is often tempting to attempt to infer the welfare effects of minimum wage changes from empirical observations on pre- and post-change employment and unemployment levels and wage or earnings distributions. Using a simple model of search, matching, and bargaining, we characterize the relationship between minimum wage levels, labor market outcomes, and the welfare of labor market participants. Using observations on wage distributions before and after changes in the nominal minimum wage, we determine what can and cannot be learned about welfare impacts from changes in various features of theses distributions. Our results are illustrated using simulation exercises and a small empirical example. Using U.S. data for young labor market participants in March 1997 and March 1998, we conclude that the increase in the minimum wage which occurred in September 1997 may have been welfare-enhacing, though various implications of the model are not consistent with the data. This analysis illustrates the fact that well-specified behavioral models are required to evaluate the impact of changes in institutional constraints on the walfare of labor market participants.

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File URL: http://econ.as.nyu.edu/docs/IO/9188/RR00-08.PDF
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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 00-08.

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Length: 46 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:cvs:starer:00-08
Contact details of provider: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Order Information: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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  1. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  2. Meyer, Robert H & Wise, David A, 1983. "The Effects of the Minimum Wage on the Employment and Earnings of Youth," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 66-100, January.
  3. Richard Dickens & Stephen Machin & Alan Manning, 1994. "Estimating the effect of minimum wages on employment from the distribution of wages: a critical view," LSE Research Online Documents on Economics 51648, London School of Economics and Political Science, LSE Library.
  4. Flinn, Christopher J, 1997. "Equilibrium Wage and Dismissal Processes," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 221-36, April.
  5. Neumark, David & Wascher, William, 1995. "Minimum-Wage Effects on School and Work Transitions of Teenagers," American Economic Review, American Economic Association, vol. 85(2), pages 244-49, May.
  6. Janet Currie & Bruce Fallick, 1993. "The Minimum Wage and the Employment of Youth: Evidence from the NLSY," NBER Working Papers 4348, National Bureau of Economic Research, Inc.
  7. Linneman, Peter, 1982. "The Economic Impacts of Minimum Wage Laws: A New Look at an Old Question," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 443-69, June.
  8. Christian Bontemps & Jean-Marc Robin & Gérard J. Van Den Berg, 2000. "Equilibrium Search with Continuous Productivity Dispersion: Theory and Nonparametric Estimation," Working Papers 249986, Institut National de la Recherche Agronomique, France.
  9. Dale T. Mortensen, 1988. "Equilibrium Wage Distrihutions: A Synthesis," Discussion Papers 811, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. James J. Heckman & Christopher J. Flinn, 1982. "New Methods for Analyzing Structural Models of Labor Force Dynamics," NBER Working Papers 0856, National Bureau of Economic Research, Inc.
  11. Meyer, Robert H & Wise, David A, 1983. "Discontinuous Distributions and Missing Persons: The Minimum Wage and Unemployed Youth," Econometrica, Econometric Society, vol. 51(6), pages 1677-98, November.
  12. Flinn, Christopher J, 1986. "Wages and Job Mobility of Young Workers," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages S88-S110, June.
  13. Bontemps, Christian & Robin, Jean-Marc & Van den Berg, Gerard J, 1999. "An Empirical Equilibrium Job Search Model with Search on the Job and Heterogeneous Workers and Firms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 1039-74, November.
  14. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA).
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