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Minimum wages and wage inequality: some theory and an application to the UK

  • Tim Butcher
  • Richard Dickens
  • Alan Manning

Research suggests that, at the levels set in countries like the US and the UK, minimum wages have little effect on employment but do have impacts on wage inequality. However we lack models that can explain these facts – this paper presents one based on imperfect labour markets. The paper also investigates the impact of the UK’s National Minimum Wage on wage inequality finding it can explain a sizeable part of the evolution of wage inequality in the bottom half of the distribution in the period 1998-2010. We also present evidence that the impact of the NMW reaches up to 40% above the NMW in 2010 which corresponds to the 25th percentile. These spillovers are larger in low-wage segments.

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File URL: http://eprints.lse.ac.uk/48937/
File Function: Open access version.
Download Restriction: no

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 48937.

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Length: 33 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:ehl:lserod:48937
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

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  1. 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.
  2. David H. Autor & Alan Manning & Christopher L. Smith, 2010. "The Contribution of the Minimum Wage to U.S. Wage Inequality over Three Decades: A Reassessment," NBER Working Papers 16533, National Bureau of Economic Research, Inc.
  3. 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.
  4. DiNardo, John & Fortin, Nicole M & Lemieux, Thomas, 1996. "Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach," Econometrica, Econometric Society, vol. 64(5), pages 1001-44, September.
  5. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, 07.
  6. 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.
  7. 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.
  8. Robert H. Meyer & David A. Wise, 1982. "The Effects of the Minimum Wage on the Employment and Earnings of Youth," NBER Working Papers 0849, National Bureau of Economic Research, Inc.
  9. Jean Baldwin Grossman, 1983. "The Impact of the Minimum Wage on Other Wages," Journal of Human Resources, University of Wisconsin Press, vol. 18(3), pages 359-378.
  10. Richard Dickens & Rebecca Riley & David Wilkinson, 2011. "The UK Minimum Wage at Age 22: A Regression Discontinuity Approach," Working Paper Series 2111, Department of Economics, University of Sussex.
  11. 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.
  12. 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 772-93, September.
  13. Kosali Ilayperuma Simon & Robert Kaestner, 2004. "Do minimum wages affect non-wage job attributes? Evidence on fringe benefits," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 58(1), pages 52-70, October.
  14. Maarten Goos & Alan Manning, 2007. "Lousy and Lovely Jobs: The Rising Polarization of Work in Britain," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 118-133, February.
  15. David S. Lee, 1999. "WAGE INEQUALITY IN THE UNITED STATES DURING THE 1980s: RISING DISPERSION OR FALLING MINIMUM WAGE?," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 977-1023, August.
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