The Minimum Wage

							The Minimum Wage
  Systems of Minimum Wages
• System of minimum wages vary across
  countries – 2 most common systems are:
  – statutory minimum wage (set by govt or in national
    collective bargain)
  – 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
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         1960   1970            1980     1990            2000
                                  Time

                       France            United States
                       United Kingdom    Australia
                       Canada
Kaitz Index – Selected Countries
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        1960   1970          1980     1990          2000
                               Time

                      Belgium         Netherlands
                      Portugal        Spain
                      New Zealand
               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
              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
 Minimum Wage and Employment
• Competitive model has a very clear
  prediction
• Minimum wage above market-clearing
  wage will cause job losses
• Follows from the fact that factor demand
  curves slope downwards
• As w=MRPL any increase in wage makes
  marginal worker unprofitable
            A Picture


                               supply
     wage

Minimum
wage




                        MRPL



                           employment
     Any models with a different
           prediction?
• Monopsony models can have a different
  prediction.
• Starting from wage chosen by monopsonist an
  increase in their wage will raise employment
• Intuition:
  – MRPL=MCL>w so marginal worker still profitable after
    rise in wage and more workers want to work
  – Employment is supply-determined and increased
    wage increases labour supply
  – Minimum wage raises average cost of labour but
    reduces marginal cost:
                         MCL=w(N)+w’(N)N
            A Picture

                 MCL

                               supply
     wage




Minimum
wage



                        MRPL




                           employment
 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
• This is efficient minimum wage to set
 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
• Therefore should look at evidence with
  open mind
• Until Card-Krueger ‘Myth and
  Measurement’ consensus in US was small
  negative employment effect especially for
  teenagers – they challenged this
           Card-Krueger
       Myth 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, Rahman
  JEEA, 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, Rahman
  JEEA, 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 1999
              Basic 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 1990s
  – Manning, 2003
But still a lot of scepticism –
   Autor, Katz, Kearney
Autor-Katz-Kearney
     Exhibit B
           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
The Care Workers Data