IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

The Behavioral Effects of Minimum Wages

  • Falk, Armin


    (University of Bonn)

  • Fehr, Ernst


    (University of Zurich)

  • Zehnder, Christian


    (University of Lausanne)

The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1625.

in new window

Length: 35 pages
Date of creation: Jun 2005
Date of revision:
Publication status: published in: Quarterly Journal of Economics, 2006, 121 (4), 1347-1381
Handle: RePEc:iza:izadps:dp1625
Contact details of provider: Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page:

Order Information: Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Alois Stutzer & Lukas Kienast, 2005. "Demokratische Beteiligung und Staatsausgaben: Die Auswirkungen des Frauenstimmrechts," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 141(IV), pages 617-650, December.
  2. Blount, Sally, 1995. "When Social Outcomes Aren't Fair: The Effect of Causal Attributions on Preferences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 63(2), pages 131-144, August.
  3. repec:oup:qjecon:v:118:y:2003:i:1:p:73-105 is not listed on IDEAS
  4. Lawrence F. Katz & Alan B. Krueger, 1991. "The Effect of the New Minimum Wage Law in a Low-Wage Labor Market," NBER Working Papers 3655, National Bureau of Economic Research, Inc.
  5. Salvador Barberà & Anke Gerber, . "A Note on the Impossibility of a Satisfactory Concept of Stability for Coalition Formation Games," IEW - Working Papers 238, Institute for Empirical Research in Economics - University of Zurich.
  6. Falk, Armin & Fehr, Ernst & Fischbacher, Urs, 2001. "On the Nature of Fair Behaviour," CEPR Discussion Papers 2984, C.E.P.R. Discussion Papers.
  7. Rafael Lalive & Jan Van Ours & Josef Zweimuller, 2006. "How Changes in Financial Incentives Affect the Duration of Unemployment," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 1009-1038.
  8. Bruno S. Frey & Alois Stutzer, . "The Role of Direct Democracy and Federalism in Local Power," IEW - Working Papers 209, Institute for Empirical Research in Economics - University of Zurich.
  9. Leoni, Patrick & Luchini, Stéphane, 2011. "Designing the financial tools to promote universal access to AIDS care," Journal of Health Economics, Elsevier, vol. 30(1), pages 181-188, January.
  10. Singer, Tania & Fehr, Ernst, 2005. "The Neuroeconomics of Mind Reading and Empathy," IZA Discussion Papers 1647, Institute for the Study of Labor (IZA).
  11. Jordi Brandts & Gary Charness, 2004. "Do Labour Market Conditions Affect Gift Exchange? Some Experimental Evidence," Economic Journal, Royal Economic Society, vol. 114(497), pages 684-708, 07.
  12. Christian Ewerhart, 2006. "The Effect of Sunk Costs on the Outcome of Alternating-Offers Bargaining Between Inequity-Averse Agents," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 58(2), pages 184-203, April.
  13. Fehr, Ernst & Kremhelmer, Susanne & Schmidt, Klaus M., 2004. "Fairness and the Optimal Allocation of Ownership Rights," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 11, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  14. De Giorgi, Enrico & Post, Thierry, 2008. "Second-Order Stochastic Dominance, Reward-Risk Portfolio Selection, and the CAPM," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(02), pages 525-546, June.
  15. Frey, Bruno S. & Stutzer, Alois, 2013. "Economic Consequences of Mispredicting Utility," IZA Discussion Papers 7430, Institute for the Study of Labor (IZA).
  16. Fehr, Ernst & Fischbacher, Urs & Kosfeld, Michael, 2005. "Neuroeconomic Foundation of Trust and Social Preferences," CEPR Discussion Papers 5127, C.E.P.R. Discussion Papers.
  17. Dufwenberg, M. & Kirchsteiger, G., 1998. "A Theory of Sequential Reciprocity," Discussion Paper 1998-37, Tilburg University, Center for Economic Research.
  18. Frey, Bruno S. & Benesch, Christine & Stutzer, Alois, 2007. "Does watching TV make us happy?," Journal of Economic Psychology, Elsevier, vol. 28(3), pages 283-313, June.
  19. Foellmi, Reto & Zweimüller, Josef, 2005. "Income Distribution and Demand-Induced Innovations," CEPR Discussion Papers 4985, C.E.P.R. Discussion Papers.
  20. Bruno S. Frey & Simon Luechinger & Alois Stutzer, 2004. "Calculating Tragedy: Assessing the Costs of Terrorism," CREMA Working Paper Series 2004-23, Center for Research in Economics, Management and the Arts (CREMA).
  21. Falk, Armin & Fischbacher, Urs, 2001. "A Theory of Reciprocity," CEPR Discussion Papers 3014, C.E.P.R. Discussion Papers.
  22. Lalive, Rafael & Zweimüller, Josef, 2005. "Does Parental Leave Affect Fertility and Return-to-Work? Evidence from a "True Natural Experiment"," IZA Discussion Papers 1613, Institute for the Study of Labor (IZA).
  23. Lawrence F. Katz & Alan B. Krueger, 1992. "The effect of the minimum wage on the fast-food industry," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 6-21, October.
  24. Falk, Armin & Fehr, Ernst & Zehnder, Christian, 2005. "The Behavioural Effects of Minimum Wages," CEPR Discussion Papers 5115, C.E.P.R. Discussion Papers.
  25. Schlicht, Ekkehart, 1998. "On Custom in the Economy," OUP Catalogue, Oxford University Press, number 9780198292241, July.
  26. Bruno S. Frey & Alois Stutzer, . "Making International Organizations More Democratic," IEW - Working Papers 217, Institute for Empirical Research in Economics - University of Zurich.
  27. Pierre Monnin, . "Are stock markets really like beauty contests? Empirical evidence of higher order belief's impact on asset prices," IEW - Working Papers 202, Institute for Empirical Research in Economics - University of Zurich.
  28. James B. Rebitzer & Lowell J. Taylor, 1991. "The Consequences of Minimum Wage Laws: Some New Theoretical Ideas," NBER Working Papers 3877, National Bureau of Economic Research, Inc.
  29. Lawrence F. Katz & Olivier Blanchard, 1999. "Wage Dynamics: Reconciling Theory and Evidence," American Economic Review, American Economic Association, vol. 89(2), pages 69-74, May.
  30. 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.
  31. Blanchflower, David G & Oswald, Andrew J, 1990. " The Wage Curve," Scandinavian Journal of Economics, Wiley Blackwell, vol. 92(2), pages 215-35.
    • David G. Blanchflower & Andrew J. Oswald, 1995. "The Wage Curve," MIT Press Books, The MIT Press, edition 1, volume 1, number 026202375x, June.
  32. Bruno S. Frey, 2005. "Knight Fever: Towards an Economics of Awards," CREMA Working Paper Series 2005-12, Center for Research in Economics, Management and the Arts (CREMA).
  33. Philipp C. Wichardt & Pavlo R. Blavatskyy, . "Base-Rate Neglect and Imperfect Information Acquisition," IEW - Working Papers 233, Institute for Empirical Research in Economics - University of Zurich.
  34. Alvin E. Roth & V. Prasnikar & M. Okuno-Fujiwara & S. Zamir, 1998. "Bargaining and market behavior in Jerusalem, Liubljana, Pittsburgh and Tokyo: an experimental study," Levine's Working Paper Archive 344, David K. Levine.
  35. Falk, Armin & Zweimüller, Josef, 2005. "Unemployment and Right-Wing Extremist Crime," IZA Discussion Papers 1540, Institute for the Study of Labor (IZA).
  36. David K. Levine, 1998. "Modeling Altruism and Spitefulness in Experiment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(3), pages 593-622, July.
  37. V. Bhaskar & Ted To, 1996. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Labor and Demography 9603001, EconWPA, revised 21 May 1996.
  38. Olivier Blanchard & Lawrence F. Katz, 1996. "What We Know and Do Not Know About the Natural Rate of Unemployment," NBER Working Papers 5822, National Bureau of Economic Research, Inc.
  39. Max Gruetter & Rafael Lalive, . "The Importance of Firms in Wage Determination," IEW - Working Papers 207, Institute for Empirical Research in Economics - University of Zurich.
  40. Martin Brown & Christian Zehnder, 2005. "Credit Registries, Relationship Banking and Loan Repayment," IEW - Working Papers 240, Institute for Empirical Research in Economics - University of Zurich.
  41. Aleksander Berentsen & Gabriele Camera & Christopher Waller, . "The Distribution of Money Balances and the Non-Neutrality of Money," IEW - Working Papers 220, Institute for Empirical Research in Economics - University of Zurich.
  42. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  43. Christian Ewerhart & Christoph Nitzsche, . ": On the Notion of the First Best in Standard Hidden Action Problems," IEW - Working Papers 229, Institute for Empirical Research in Economics - University of Zurich.
  44. Gruetter, Max, 2005. "Returns to Foreign Education: Yet Another But Different Cross Country Analysis," IZA Discussion Papers 1615, Institute for the Study of Labor (IZA).
  45. repec:oup:qjecon:v:116:y:2001:i:4:p:1149-1187 is not listed on IDEAS
  46. 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.
  47. Joseph P. Romano & Azeem M. Shaikh & Michael Wolf, 2010. "multiple testing," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  48. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, . "Optimal Allotment Policy in Central Bank Open Market Operations," IEW - Working Papers 201, Institute for Empirical Research in Economics - University of Zurich.
  49. William M. Boal & Michael R. Ransom, 1997. "Monopsony in the Labor Market," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 86-112, March.
  50. Stephen Machin & Alan Manning, 1992. "Minimum Wages," CEP Discussion Papers dp0080, Centre for Economic Performance, LSE.
  51. Philipp C. Wichardt, . "An Application of Global Games to Signalling Models," IEW - Working Papers 223, Institute for Empirical Research in Economics - University of Zurich.
  52. Pavlo R. Blavatskyy, . "A Stochastic Expected Utility Theory," IEW - Working Papers 231, Institute for Empirical Research in Economics - University of Zurich.
  53. Richard B. Freeman & Wayne B. Gray & Casey Ichniowski, 1981. "Low-Cost Student Labor: The Use and Effects of the Subminimum Wage Provisions for Full-time Students," NBER Working Papers 0765, National Bureau of Economic Research, Inc.
  54. David Card & Lawrence F. Katz & Alan B. Krueger, 1994. "Comment on "Employment effects of minimum and subminimum wages: Panel data on state minimum wage laws," by David Neumark and William Wascher (46:1, Oct. 1992, p. 55)," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(3), pages 487-512, April.
  55. Fehr, Ernst & Schmidt, Klaus M., 2001. "Theories of Fairness and Reciprocity," Discussion Papers in Economics 14, University of Munich, Department of Economics.
  56. Peter Woehrmann & Willi Semmler & Martin Lettau, . "Nonparametric Estimation of the Time-varying Sharpe Ratio in Dynamic Asset Pricing Models," IEW - Working Papers 225, Institute for Empirical Research in Economics - University of Zurich.
  57. repec:oup:qjecon:v:110:y:1995:i:4:p:1111-25 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp1625. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.