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The Effects of Minimum Wages on Employment: Theory and Evidence from the US

  • Richard Dickens
  • Stephen Machin
  • Alan Manning

Recent work on the economic effects of minimum wages has stressed that the standard economic model, where increases in minimum wages depress employment, is not supported by the empirical findings in some labour markets. In this paper we present a theoretical framework which is general enough to allow minimum wages to have the conventional negative impact on employment, but which also allows for the possibility of a neutral or a positive effect. The model structure is based on labour market frictions which give employers some degree of monopsony power. The formulated model has a number of empirical implications which we go on to test using data on industry-based minimum wages set by the UK Wages Councils between 1975 and 1990. Some strong results emerge: minimum wages significantly compress the distribution of earnings and, contrary to conventional economic wisdom but in line with several recent studies, do not have a negative impact on employment. If anything, the relationship between minimum wages and employment is estimated to be positive.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4742.

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Date of creation: May 1994
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Publication status: Published as "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain", JLE, Vol. 17, no. 1 (January 1999): 1-22.
Handle: RePEc:nbr:nberwo:4742
Note: LS
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  1. Nickell, S. & Wadhwani, S., 1989. "Insider Forces And Wage Determination," Papers 334, London School of Economics - Centre for Labour Economics.
  2. William T. Dickens & Lawrence F. Katz, 1986. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
  3. Kaufman, Roger T, 1989. "The Effects of Statutory Minimum Rates of Pay on Employment in Great Britain," Economic Journal, Royal Economic Society, vol. 99(398), pages 1040-53, December.
  4. Stephen Machin & Alan Manning, 1992. "Minimum Wages," CEP Discussion Papers dp0080, Centre for Economic Performance, LSE.
  5. 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.
  6. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  7. David Card & Lawrence Katz & Alan Krueger, 1993. "Comment on David Neumark and William Wascher, 'Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws'," Working Papers 695, Princeton University, Department of Economics, Industrial Relations Section..
  8. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  9. Stephen Machin & Alan Manning & S Woodland, 1993. "Are Workers Paid their Marginal Product? Evidence from a Low Wage Labour Market," CEP Discussion Papers dp0158, Centre for Economic Performance, LSE.
  10. Lawrence F. Katz & Alan B. Krueger, 1992. "The Effect of the Minimum Wage on the Fast-Food Industry," ILR Review, Cornell University, ILR School, vol. 46(1), pages 6-21, October.
  11. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October.
  12. Robert H. Meyer & David A. Wise, 1982. "The Effects of the Minimum Wage on the Employment and Earnings of Youth," NBER Working Papers 0849, National Bureau of Economic Research, Inc.
  13. 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.
  14. 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.
  15. Sullivan, Daniel, 1989. "Monopsony Power in the Market for Nurses," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages S135-78, October.
  16. Robert H. Meyer & David A. Wise, 1981. "Discontinuous Distributions and Missing Persons: The Minimum Wage and Unemployed Youth," NBER Working Papers 0711, National Bureau of Economic Research, Inc.
  17. 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.
  18. David Card, 1991. "Do Minimum Wages Reduce Employment? A Case Study of California, 1987-89," NBER Working Papers 3710, National Bureau of Economic Research, Inc.
  19. Calvo, Guillermo A & Wellisz, Stanislaw, 1979. "Hierarchy, Ability, and Income Distribution," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 991-1010, October.
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