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Does the Minimum Wage Cause Inefficient Rationing?

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  • Erzo F.P. Luttmer

Abstract

This paper investigates whether the minimum wage leads to inefficient job rationing. By not allowing wages to clear the labor market, the minimum wage could cause workers with low reservation wages to be rationed out while equally skilled workers with higher reservation wages are employed. This paper exploits the overlapping nature of the CPS panels to more precisely identify those most affected by the minimum wage, a group I refer to as the "unskilled." I test for inefficient rationing by examining whether the reservation wages of employed unskilled workers in states where the 1990-1991 federal minimum wage increase had the largest impact rose relative to reservation wages of unskilled workers in other states. I find that reservation wages of unskilled workers in high-impact states did not rise relative to reservation wages in other states, indicating that the increase in the minimum wage did not cause jobs to be allocated less efficiently.

Suggested Citation

  • Erzo F.P. Luttmer, 2007. "Does the Minimum Wage Cause Inefficient Rationing?," NBER Working Papers 13012, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13012
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    Citations

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    Cited by:

    1. John Bennett & Ioana Chioveanu, 2017. "The optimal minimum wage with regulatory uncertainty," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(6), pages 1099-1116, December.
    2. Andersson, Tommy & Yang, Zaifu & Zhang, Dongmo, 2015. "How to efficiently allocate houses under price controls?," Economics Letters, Elsevier, vol. 130(C), pages 97-99.
    3. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
    4. Aart Gerritsen, 2016. "Equity and Efficiency in Rationed Labor Markets," Working Papers tax-mpg-rps-2016-04, Max Planck Institute for Tax Law and Public Finance.
    5. Lucas W. Davis & Lutz Kilian, 2011. "The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas," Journal of Political Economy, University of Chicago Press, vol. 119(2), pages 212-241.
    6. Bulow, Jeremy I. & Klemperer, Paul, 2009. "Price Controls and Consumer Surplus," CEPR Discussion Papers 7412, C.E.P.R. Discussion Papers.
    7. repec:pri:cepsud:178lee is not listed on IDEAS
    8. repec:eee:pubeco:v:153:y:2017:i:c:p:56-68 is not listed on IDEAS
    9. Aart Gerritsen & Bas Jacobs, 2014. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," CESifo Working Paper Series 4588, CESifo Group Munich.
    10. Aart Gerritsen, 2016. "How Many Harberger Triangles Does it Take to Fill one Okun Gap?," Working Papers tax-mpg-rps-2016-05, Max Planck Institute for Tax Law and Public Finance.

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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