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The Consequences of Minimum Wage Laws: Some New Theoretical Ideas

  • James B. Rebitzer
  • Lowell J. Taylor

Economists generally agree that the immediate and direct effect of a binding minimum wage law is to move firms backward along the demand curve for low skill workers. However, this prediction of worker displacement depends critically on a model of firm behavior that abstracts from problems of work incentives. In this paper we re-examine the theoretical basis for the consensus view of minimum wage laws. The central finding is that when firms use the threat of dismissal to elicit high levels of work effort, an increase in the minimum wage may have the immediate and direct effect of increasing the level of employment in low wage jobs. The formal logic of our model is similar to that found in the model of labor demand under monopsony. However, unlike the monopsony model, the positive employment effect of the minimum wage emerges in a labor market comprised of a large number of firms competing for the labor services of identical workers.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3877.

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Date of creation: Oct 1991
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Publication status: published as Journal of Public Economics, Vol. 56, no. 2 (1995): 245-255.
Handle: RePEc:nbr:nberwo:3877
Note: LS
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  1. Alida Castillo-Freeman & Richard B. Freeman, 1992. "When the Minimum Wage Really Bites: The Effect of the U.S.-Level Minimum on Puerto Rico," NBER Chapters, in: Immigration and the Workforce: Economic Consequences for the United States and Source Areas, pages 177-212 National Bureau of Economic Research, Inc.
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  8. Robert Gibbons, 1986. "Piece-Rate Incentive Schemes," Working papers 424, Massachusetts Institute of Technology (MIT), Department of Economics.
  9. Bulow, Jeremy I & Summers, Lawrence H, 1986. "A Theory of Dual Labor Markets with Application to Industrial Policy,Discrimination, and Keynesian Unemployment," Journal of Labor Economics, University of Chicago Press, vol. 4(3), pages 376-414, July.
  10. Levine, David I., 1992. "Piece rates, output restriction, and conformism," Journal of Economic Psychology, Elsevier, vol. 13(3), pages 473-489, September.
  11. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," NBER Working Papers 4058, National Bureau of Economic Research, Inc.
  12. David Card & Alan B. Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," NBER Working Papers 4509, National Bureau of Economic Research, Inc.
  13. Katz, L.F. & Krueger, A.B, 1991. "The Effect Of The New Minimum Wage Law In A Low-Wage Labor Market," Harvard Institute of Economic Research Working Papers 1544, Harvard - Institute of Economic Research.
  14. Summers, Lawrence H. & Dickens, William T. & Katz, Lawrence F. & Lang, Kevin, 1989. "Employee Crime and the Monitoring Puzzle," Scholarly Articles 3645199, Harvard University Department of Economics.
  15. L. J. Taylor & T. Kim, . "The employment effect in retail trade of California's 1988 minimum wage increase," Institute for Research on Poverty Discussion Papers 1018-93, University of Wisconsin Institute for Research on Poverty.
  16. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
  17. MacLeod, W. Bentley & Malcomson, James M., 1993. "Wage premiums and profit maximization in efficiency wage models," European Economic Review, Elsevier, vol. 37(6), pages 1223-1249, August.
  18. Rebitzer, James B & Robinson, Michael D, 1991. "Employer Size and Dual Labor Markets," The Review of Economics and Statistics, MIT Press, vol. 73(4), pages 710-15, November.
  19. Alida Castillo Freeman & Richard B. Freeman, 1991. "Minimum Wages in Puerto Rico: Textbook Case of a Wage Floor?," NBER Working Papers 3759, National Bureau of Economic Research, Inc.
  20. Oliver E. Williamson, 1967. "Hierarchical Control and Optimum Firm Size," Journal of Political Economy, University of Chicago Press, vol. 75, pages 123.
  21. Holzer, Harry J & Katz, Lawrence F & Krueger, Alan B, 1991. "Job Queues and Wages," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 739-68, August.
  22. Lang, Kevin, 1988. "Job Signalling and Welfare Improving Minimum Wage Laws: Reply," Economic Inquiry, Western Economic Association International, vol. 26(3), pages 533-36, July.
  23. Rebitzer, James B. & Taylor, Lowell J., 1995. "The consequences of minimum wage laws Some new theoretical ideas," Journal of Public Economics, Elsevier, vol. 56(2), pages 245-255, February.
  24. Kenneth Burdett & Dale T. Mortensen, 1989. "Equilibrium Wage Differentials and Employer Size," Discussion Papers 860, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  25. David Neumark & William Wascher, 1992. "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws," ILR Review, Cornell University, ILR School, vol. 46(1), pages 55-81, October.
  26. Calvo, Guillermo A & Wellisz, Stanislaw, 1978. "Supervision, Loss of Control, and the Optimum Size of the Firm," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 943-52, October.
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