The Minimum Wage

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The Minimum Wage

• (by Alan Manning)

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Minimum Wages

• Systems of minimum wages vary across countries
  2 most common systems are
• statutory minimum wage (set by govt or in
  national collective bargaining)
• set by sectoral collective bargains with
  extension to non-signatory employers
• Some countries have a single minimum (e.g. US),
  others have variation by age, region, industry,
  occupation
• Measure of bite of minimum wage
• Kaitz index minimum/median
• Spike percentage of workers at minimum

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Kaitz Index selected countries
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Kaitz Index Selected Countries
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Kaitz Index (net, at mean) OECD
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Kaitz Index in Labor Costs OECD
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Summary

• Minimum wage lowest in US, highest in France
  but age variation in FR, not US
• For teenagers US Kaitz 80-90
• Most countries have Kaitz index of 40-50
• No big increases in recent years most countries
  have falls
• CZ in 2007 8000 / 19300 42
• CZ in 2003 6200 / 15000 41

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Introduction

• Have introduced in context of institutions that
  might affect wage inequality
• But will also have discussion about impact on
  employment as this is often regarded as most
  interesting question
• Effect on labor supply (and wage gains of
  low-skilled) often ignored.

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Minimum Wage and Employment

• Competitive model has a very clear prediction
• Minimum wage above market-clearing wage will
  cause job losses (unemployment)
• Follows from the fact that factor demand curves
  slope downwards
• As wMRPL any increase in wage makes marginal
  worker unprofitable

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A Picture
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Any models with a different prediction?

• Monopsony can give a different prediction
  Starting from wage chosen by monopsonist, an
  increase wage will raise employment. Intuition
• MRPLMCLgtw so marginal worker still profitable
  after rise in wage and more workers want to work
• Y(N)MRPLMCLw(N)w(N)N
• Employment is supply-determined and increased
  wage increases labour supply

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A Picture
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Can one raise the minimum wage and employment
without limit?

• Does not sound very plausible
• Will not be possible there comes a point where
  employment demand determined can think of
  Nmin(Ns(w),Nd(w))
• Employment will be maximized at wage where
  Ns(w)Nd(w) i.e. market-clearing wage
  (intersection of supply and MRPL)
• This is efficient minimum wage to set (with no
  involuntary unemployment)

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How useful is this in practice?

• Market-clearing wage different in different
  labour markets by age, education, region
• Typically minimum wage does not have much
  variation too high in some markets, too low in
  others.
• It is a blunt policy instrument
• Also have only considered single employer
  interactions are likely to be important

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Models of Oligopsony

• May have very different prediction about
  employment effect of minimum wage
• E.g. suppose labour supply curve is
• NiBi(Wi/W)e
• Where W is average wage
• Then each employer has some monopsony power but
  raising minimum wage does not raise employment

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Conclusion on Theory

• Competitive model has clear prediction
• Monopsony prediction ambiguous
• gt should look at evidence with open mind
• Lee Saez (2008) if society cares about equity
  (wages of low-skilled) MW welfare improving
  despite disemployment effects.
• Until Card-Krueger Myth and Measurement
  consensus in US was small negative employment
  effect especially for teenagers

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Card-KruegerMyth and Measurement

• Re-examined all evidence for negative employment
  effects of minimum wage
• Look at variety of natural experiments
• Concluded no evidence for view that minimum wage
  causes job loss
• Will focus on NJ/PA study as that is most famous
• also Card-Krueger, AER 94
• Neumark-Wascher, Card-Krueger, AER 00

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The NJ/PA Study

• US system of minimum wages is a federal minimum
  with individual states choosing higher minimum if
  they want
• in 1992 NJ raised its minimum wage to 5.05
  above the federal minimum of 4.25
• NJ fast food restaurants the treatment group,
  restaurants in eastern PA the control group
• Data collected by phone interview before and
  after rise in NJ minimum wage

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A Map
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Effect on Wages
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Basic Results Difference in Difference Estimator
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Neumark-Wascher Criticism

• They argued data was of very poor quality,
  especially on dependent variable does this
  matter?
• Got hold of payroll data and claimed to find
  evidence of negative employment effects
• Unfortunately some of this data was supplied by
  noted opponent of minimum wage so perhaps not
  random sample
• Results strongest in this sub-sample
• Perhaps some evidence of reduction in hours per
  worker
• See AER 2000 for exchange and make your own mind
  up

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Longer Time Series Using Administrative Data
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Evidence on Employment Effects for other Countries

• The UK
• Studies of introduction of NMW in 1999
• Aggregate studies failed to find any impact
• Machin, Manning, Rahman did find small negative
  effect among care workers where 30 affected
• Problem for many other countries is lack of big
  change to be basis of natural experiment
• E.g. France SMIC seems very high but lack of
  much variation in recent years means that hard to
  evaluate

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Machin, Manning, RahmanJEEA, 2003 Research
Design

• Sample of care workers in retirement homes for
  elderly very low paid job
• Surveyed both before and after introduction of
  NMW
• Some homes unaffected as initially paid above NMW
  these are effectively the control group
• Look at change in hours and employment

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Machin, Manning, RahmanJEEA, 2003 - Results
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The Minimum Wage and Wage Inequality

• Yet again, most research for US
• Consensus was that minimum wage unimportant for
  wage inequality as lt5 of workers paid the
  minimum wage
• This was challenged by
• Dinardo, Fortin, Lemiuex, Ecta, 1996
• Lee, QJE 1999

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diNardo, Fortin, Lemiuex

• Pointed out that minimum wage had a very obvious
  effect on wage distribution in 1979
• Because it did not change in nominal terms in
  period until 1990, declined in real terms so
  seemed unimportant by the end
• But can help to explain rise in lower-end wage
  inequality
• Especially true for women

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A Picture to give flavour of results
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Lee, QJE 1999Basic idea

• Federal minimum wage does not vary across states
  but average level of wages does so minimum wage
  more important in AK than in NY
• If minimum wage important for wage inequality
  should see bigger rise in wage inequality in
  low-wage states
• This is what he finds

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A Picture to Summarize Results
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Interpretation

• Low-end wage inequality initially much smaller in
  low-wage states in 1979 consistent with minimum
  wage being important
• Low-end wage inequality then rises much faster in
  low-wage states
• Top-end wage inequality similar in low- and
  high-wage states and shows no trend
• Concludes that min wage can explain almost all of
  rise in low-end wage inequality in 1980s
• Implies substantial spill-overs

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Evidence from UK

• Initial studies of impact effect of introduction
  of NMW suggested modest effect because only 5
  directly affected and there seemed no
  spilll-overs e.g. Dickens-Manning, EJ 2004
• But perhaps some indication that more powerful in
  longer-run
• Perhaps can explain most or all or reduction in
  low-end wage inequality in UK but cant explain
  the top
• CZ little data available on low-wage sectors