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Minimum Wage Effects and Low-Wage Labor Markets: A Disequilibrium Approach

  • David Neumark
  • William Wascher

We present a new approach to estimating minimum wage effects on employment. In contrast to most previous research, we account for the possibility that the relationship between minimum wages and employment depends on the magnitude of the minimum wage relative to the equilibrium wage in the absence of the legislated minimum. In particular, estimating the employment effects of binding minimum wages requires separation of sample observations into those that are on the labor demand curve but off the labor supply curve, and those that are at labor market equilibria. The paper implements an endogenous switching regression model with unknown sample separation that yields these estimates. The approach also yields estimates of the impact of labor market characteristics on the probability that minimum wages are binding. We also extend the disequilibrium approach to monopsony, which introduces a third regime, between the equilibrium monopsony wage and the equilibrium competitive wage, in which observations are on the labor supply curve but off the labor demand curve and minimum wages are therefore positively related to employment. Minimum wage effects under monopsony are estimated in a three-regime endogenous switching regression model with unknown regimes, and the monopsony characterization of low-wage labor markets is tested against the competitive characterization.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4617.

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Date of creation: Jan 1994
Date of revision:
Publication status: Published as "Minimum Wage Effects on Employment and School Enrollment", Journal of Business & Economic Statistics, Vol. 13, no. 2 (1995): 199-206.
Handle: RePEc:nbr:nberwo:4617
Note: LS
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  1. 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.
  2. 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.
  3. David Card & Lawrence F. Katz & Alan B. Krueger, 1993. "An Evaluation of Recent Evidence on the Employment Effects of Minimum and Subminimum Wages," NBER Working Papers 4528, National Bureau of Economic Research, Inc.
  4. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-33, March.
  5. David Neumark & William Wascher, 1993. "Employment Effects of Minimum and Subminimum Wages: Reply to Card, Katz and Krueger," NBER Working Papers 4570, National Bureau of Economic Research, Inc.
  6. William J. Carrington & Bruce C. Fallick, 1999. "Minimum wage careers?," Finance and Economics Discussion Series 1999-46, Board of Governors of the Federal Reserve System (U.S.).
  7. Richard B. Freeman, 1982. "Economic Determinants of Geographic and Individual Variation in the Labor Market Position of Young Persons," NBER Chapters, in: The Youth Labor Market Problem: Its Nature, Causes, and Consequences, pages 115-154 National Bureau of Economic Research, Inc.
  8. 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.
  9. Alison J. Wellington, 1991. "Effects of the Minimum Wage on the Employment Status of Youths: An Update," Journal of Human Resources, University of Wisconsin Press, vol. 26(1), pages 27-46.
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