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Setting the Minimum Wage

Author

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  • Boeri, Tito

    (Bocconi University)

Abstract

The process leading to the setting of the minimum wage so far has been fairly overlooked by economists. This paper suggests that this is a serious limitation as the setting regime contributes to explain cross-country variation in the fine-tuning of the minimum wage, hence in the way in which the trade-off between reducing poverty among working people and shutting down low productivity jobs is addressed. There are two common ways of setting national minimum wages: they are either government legislated or are the outcome of collective bargaining agreements, which are extended erga omnes to all workers. We develop a simple model relating the level of the minimum wage to the setting regime. Next, we exploit a new data set on minimum wages in 66 countries that had already or introduced a minimum wage in the period 1981-2005 to test the implications of the model. We find that a Government legislated minimum wage is lower than a wage floor set within collective agreements. This effect survives to several robustness checks and hints at a causal relation between the setting regime and the level of the minimum wage.

Suggested Citation

  • Boeri, Tito, 2009. "Setting the Minimum Wage," IZA Discussion Papers 4335, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp4335
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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