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Product Market Evidence on the Employment Effects of the Minimum Wage

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  • Eric French
  • Dan Aaronson

Abstract

We calibrate a model of labor demand to infer the employment response to a change in the minimum wage in the food away from home industry. Assuming a perfectly competitive labor market, the model predicts a 2.5 to 3.5 percent fall in employment in response to a 10 percent minimum wage change. We then introduce monopsony power in local labor markets. We identify the extent of monopsony power using information on the degree to which minimum wage cost shocks are passed on to consumers in the form of higher prices. Whereas the competitive model implies that employment falls and prices rise in response to an increase in the minimum wage, the monopsony model potentially implies that employment can rise and prices fall in response to an increase in the minimum wage. Previous research shows that prices rise in response to an increase in the minimum wage. We show that this price response is consistent with the prediction of the competitive model. Calibrating the full model, we can place fairly tight bounds on the elasticity of demand for labor with the most plausible parameter values suggesting a 2 to 3 percent loss in employment in reaction to a 10 percent increase in the minimum wage.

Suggested Citation

  • Eric French & Dan Aaronson, 2004. "Product Market Evidence on the Employment Effects of the Minimum Wage," Econometric Society 2004 North American Summer Meetings 549, Econometric Society.
  • Handle: RePEc:ecm:nasm04:549
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    Cited by:

    1. Jonathan Wadsworth, 2010. "Did the National Minimum Wage Affect UK Prices?," Fiscal Studies, Institute for Fiscal Studies, vol. 31(1), pages 81-120, March.
    2. Brian Bell & Stephen Machin, 2018. "Minimum Wages and Firm Value," Journal of Labor Economics, University of Chicago Press, vol. 36(1), pages 159-195.
    3. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," NBER Working Papers 12663, National Bureau of Economic Research, Inc.
    4. Sara Lemos, 2004. "The Effects of the Minimum Wage on Prices in Brazil," Labor and Demography 0403011, EconWPA.
    5. Lemos, Sara, 2004. "The Effect of the Minimum Wage on Prices," IZA Discussion Papers 1072, Institute for the Study of Labor (IZA).
    6. Mirko Draca & Stephen Machin & John Van Reenen, 2011. "Minimum Wages and Firm Profitability," American Economic Journal: Applied Economics, American Economic Association, vol. 3(1), pages 129-151, January.
    7. Daniel Aaronson & Eric French & James M. MacDonald, 2004. "The minimum wage and restaurant prices," Working Paper Series WP-04-21, Federal Reserve Bank of Chicago.
    8. Dube, Arindrajit & Lester, T. William & Reich, Michael, 2011. "Do Frictions Matter in the Labor Market? Accessions, Separations, and Minimum Wage Effects," Institute for Research on Labor and Employment, Working Paper Series qt4t3342nd, Institute of Industrial Relations, UC Berkeley.
    9. Denis Fougere & Erwan Gautier & Herve Le Bihan, 2010. "Restaurant Prices and the Minimum Wage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1199-1234, October.
    10. Korkeamäki, Ossi, 2011. "The Finnish payroll tax cut experiment revisited," Working Papers 22, VATT Institute for Economic Research.
    11. Daniel Aaronson & Brian Phelan, 2016. "Wage Shocks and the Technological Substitution of Low-Wage Jobs," Upjohn Working Papers and Journal Articles 17-266, W.E. Upjohn Institute for Employment Research.
    12. Eva Lajtkepová, 2010. "Minimum Wage and Labour Market," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2010(1), pages 3-20.
    13. Anna Baranowska-Rataj & Iga Magda, 2015. "The impact of the minimum wage on job separations and working hours among young people in Poland," Working Papers 75, Institute of Statistics and Demography, Warsaw School of Economics.
    14. Michael R. Strain & Jeffrey Clemens, 2017. "Estimating the employment effects of recent minimum wage changes: Early evidence, an interpretative framework, and a pre-commitment to future analysis," AEI Economics Working Papers 914893, American Enterprise Institute.
    15. Daniel MacDonald & Eric Nilsson, 2016. "The Effects of Increasing the Minimum Wage on Prices: Analyzing the Incidence of Policy Design and Context," Upjohn Working Papers and Journal Articles 16-260, W.E. Upjohn Institute for Employment Research.
    16. Kraft, Kornelius & Rammer,Christian & Gottschalk, Sandra, 2012. "Minimum wages and competition: The case of the German roofing sector," ZEW Discussion Papers 12-083, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    17. Daniel Aaronson & Eric French & James MacDonald, 2008. "The Minimum Wage, Restaurant Prices, and Labor Market Structure," Journal of Human Resources, University of Wisconsin Press, vol. 43(3), pages 688-720.
    18. Andrea Bassanini & Danielle Venn, 2008. "The Impact of Labour Market Policies on Productivity in OECD Countries," International Productivity Monitor, Centre for the Study of Living Standards, vol. 17, pages 3-15, Fall.
    19. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited, or where did the money go?," ERSA conference papers ersa11p898, European Regional Science Association.
    20. Kambayashi, Ryo & Kawaguchi, Daiji & Yamada, Ken, 2013. "Minimum wage in a deflationary economy: The Japanese experience, 1994–2003," Labour Economics, Elsevier, vol. 24(C), pages 264-276.
    21. Even, William E. & Macpherson, David A., 2012. "The Effect of Tip Credits on Earnings and Employment in the U.S. Restaurant Industry," IZA Discussion Papers 7092, Institute for the Study of Labor (IZA).
    22. Isaac Sorkin, 2015. "Are There Long-Run Effects of the Minimum Wage?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 306-333, April.
    23. Bonanno, Alessandro & Lopez, Rigoberto A., 2012. "Wal-Mart's monopsony power in metro and non-metro labor markets," Regional Science and Urban Economics, Elsevier, vol. 42(4), pages 569-579.
    24. James M. MacDonald & Daniel Aaronson, 2006. "How Firms Construct Price Changes: Evidence from Restaurant Responses to Increased Minimum Wages," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(2), pages 292-307.
    25. repec:siu:wpaper:35-2012 is not listed on IDEAS

    More about this item

    Keywords

    minimum wage; labor demand; monopsony;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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