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The Asymmetric Effect of Wage Floors: A Natural Experiment with a Rising and Falling Minimum Wage

Author

Listed:
  • Huet-Vaughn, Emiliano

    (Pomona College)

  • Piqueras, Jon

    (University College London)

Abstract

Exploiting a unique natural experiment,we showthe asymmetric effects of a large increase and an equivalent subsequent decrease to a binding minimum wage. Wages in a leading low-wage industry increase as the minimumwage rises, but do not fall when it is lowered. This boost for low-wage workers' earnings is apparently permanent five years after the policy is revoked, providing novel evidence of hysteresis in wage setting from temporary labor policy. In the first year post repeal this is consistent with downward nominal wage rigidity. But, the elevated earnings persist even in high inflation times, contrary to the prediction from existing work that real wage reductions under high inflation should erode the nominal wage gap relative to unaffected firms. Our findings thus challenge the conventional view that inflation "greases the wheels" of the labor market in the face of downward nominal wage rigidity, and, demonstrate the value of even transitory labor market policy in achieving permanent gains for workers (play it while you got it).

Suggested Citation

  • Huet-Vaughn, Emiliano & Piqueras, Jon, 2023. "The Asymmetric Effect of Wage Floors: A Natural Experiment with a Rising and Falling Minimum Wage," IZA Discussion Papers 16684, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp16684
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    References listed on IDEAS

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    1. Jeffrey Clemens & Michael R. Strain, 2021. "The Heterogeneous Effects of Large and Small Minimum Wage Changes: Evidence over the Short and Medium Run Using a Pre-Analysis Plan," NBER Working Papers 29264, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    hysteresis; minimum wage; downward nominal wage rigidity;
    All these keywords.

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J8 - Labor and Demographic Economics - - Labor Standards
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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