The Minimum Wage

(by Alan Manning)

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

Kaitz Index – selected countries

.3.4

.5.6

.7M

inim

um

/Me

dian

Wag

es

1960 1970 1980 1990 2000Time

France United StatesUnited Kingdom AustraliaCanada

Kaitz Index – Selected Countries

.3.4

.5.6

.7M

inim

um

/Me

dian

Wag

es

1960 1970 1980 1990 2000Time

Belgium NetherlandsPortugal SpainNew Zealand

Kaitz Index (net, at mean) – OECD

Kaitz Index in Labor Costs – OECD

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%

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.

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 w=MRPL any increase in wage makes marginal worker unprofitable

A Picture

wage

employment

MRPL

supply

Minimumwage

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:– MRPL=MCL>w so marginal worker still

profitable after rise in wage and more workers want to work

Y’(N)=MRPL=MCL=w(N)+w’(N)N

– Employment is supply-determined and increased wage increases labour supply

A Picture

wage

employment

MRPL

supply

Minimumwage

MCL

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 N=min(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)

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

Models of Oligopsony

• May have very different prediction about employment effect of minimum wage

• E.g. suppose labour supply curve is:

Ni=Bi(Wi/W)ε

• Where W is average wage

• Then each employer has some monopsony power but raising minimum wage does not raise employment

Conclusion on Theory• Competitive model has clear prediction

• Monopsony prediction ambiguous

• => 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

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

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

A Map

Effect on Wages

Basic Results – Difference in Difference Estimator

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

Longer Time Series Using Administrative Data

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

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

Machin, Manning, RahmanJEEA, 2003 - Results

The Minimum Wage and Wage Inequality

• Yet again, most research for US

• Consensus was that minimum wage unimportant for wage inequality as <5% of workers paid the minimum wage

• This was challenged by:– Dinardo, Fortin, Lemiuex, Ecta, 1996– Lee, QJE 1999

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

A Picture to give flavour of results

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

A Picture to Summarize Results

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

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 can’t explain the top

• CZ: little data available on low-wage sectors