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Minimum wage setting and standards of fairness

Author

Listed:
  • David A. Green

    () (Institute for Fiscal Studies and University of British Colombia)

  • Kathryn Harrison

    (Institute for Fiscal Studies)

Abstract

We examine the setting of minimum wages, arguing that they can best be understood as a reflection of voters' notions of fairness. We arrive at this conclusion through an empirical investigation of the implications of three models, considered in the context of policy setting by sub-units in a federation: a competing interests group model; a constrained altruism model; and a fairness based model. In the latter model, voters are interested in banning what they view to be unfair transactions, with the notion of fairness based on comparisons to the "going" unskilled wage. We use data on minimum wages set in the ten Canadian provinces from 1969 to 2005 to carry out the investigation. A key implication of the models that is borne out in the data is that minimum wages should be set as a positive function of the location of the unskilled wage distribution. Together, the results indicate that minimum wages are set according to a "fairness" standard and that this may exacerbate movements in inequality.

Suggested Citation

  • David A. Green & Kathryn Harrison, 2010. "Minimum wage setting and standards of fairness," IFS Working Papers W10/09, Institute for Fiscal Studies.
  • Handle: RePEc:ifs:ifsewp:10/09
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    More about this item

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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