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Interpreting minimum wage effects on wage distribution: a cautionary tale

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  • Christopher J. Flinn

Abstract

It is often tempting to attempt to infer the welfare 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 these distributions. Our results are illustrated using simulation exercises and a small empirical examples. 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-enhancing, hough 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 welfare of labor market participants.

Suggested Citation

  • Christopher J. Flinn, 2000. "Interpreting minimum wage effects on wage distribution: a cautionary tale," ICER Working Papers 05-2000, ICER - International Centre for Economic Research, revised May 2000.
    • Handle: RePEc:icr:wpicer:05-2000
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    2. Panagiotis Nanos, 2023. "Minimum wage spillover effects and social welfare in a model of stochastic job matching," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(4), pages 753-802, August.
    3. Mueller, Kai-Uwe & Steiner, Viktor, 2013. "Behavioral effects of a federal minimum wage and income inequality in Germany," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79784, Verein für Socialpolitik / German Economic Association.
    4. Eckstein, Zvi & Ge, Suqin & Petrongolo, Barbara, 2006. "Job and wage mobility in a search model with non-compliance (exemptions) with the minimum wage," LSE Research Online Documents on Economics 4961, London School of Economics and Political Science, LSE Library.
    5. Flabbi, Luca, 2010. "Prejudice and gender differentials in the US labor market in the last twenty years," Journal of Econometrics, Elsevier, vol. 156(1), pages 190-200, May.
    6. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute of Labor Economics (IZA).
    7. James Mabli & Christopher Flinn, 2007. "On-the-Job Search, Minimum Wages, and Labor Market Outcomes in an Equilibrium Bargaining Framework," 2007 Meeting Papers 791, Society for Economic Dynamics.
    8. Doruk Cengiz & Arindrajit Dube & Attila Lindner & David Zentler-Munro, 2022. "Seeing beyond the Trees: Using Machine Learning to Estimate the Impact of Minimum Wages on Labor Market Outcomes," Journal of Labor Economics, University of Chicago Press, vol. 40(S1), pages 203-247.
    9. Malul Miki & Luski Israel, 2009. "The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-24, November.

    More about this item

    Keywords

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    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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