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Efficiency wages and the economic effects of the minimum wage: evidence from a low-wage labour market

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  • Georgiadis, Andreas

Abstract

We exploit a natural experiment provided by the 1990 introduction of the UK National Minimum Wage (NMW) to investigate the relationship between wages and monitoring and to test for Efficiency Wages considerations in a low-wage sector, the UK residential care homes industry. Our findings seem to support the wage-supervision trade-off prediction of the shirking model, and that employers didn't dissipate minimum wage rents by increasing work intensity or effort requirements on the job. Estimation results suggest that higher wage costs were more than offset by lower monitoring costs, and thus the overall evidence imply that the NMW may have operated as an Efficiency Wage. These findings support Efficiency Wage models used to explain a non-negative employment effect of the Minimum Wage and provide an explanation of recent evidence from the care homes sector that although the wage structure was heavily affected by the NMW introduction, there were moderate employment effects.

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  • Georgiadis, Andreas, 2008. "Efficiency wages and the economic effects of the minimum wage: evidence from a low-wage labour market," LSE Research Online Documents on Economics 19628, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:19628
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    2. Papps, Kerry L., 2010. "Productivity under Large Pay Increases: Evidence from Professional Baseball," IZA Discussion Papers 5133, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Efficiency Wages; National Minimum Wage; Wage-supervision trade-off;
    All these keywords.

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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