The Minimum Wage and Labor Market Outcomes

The Minimum Wage and Labor Market Outcomes

Christopher J. Flinn
Copyright Date: 2010
Published by: MIT Press
Pages: 320
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  • Book Info
    The Minimum Wage and Labor Market Outcomes
    Book Description:

    In The Minimum Wage and Labor Market Outcomes, Christopher Flinn argues that in assessing the effects of the minimum wage (in the United States and elsewhere), a behavioral framework is invaluable for guiding empirical work and the interpretation of results. Flinn develops a job search and wage bargaining model that is capable of generating labor market outcomes consistent with observed wage and unemployment duration distributions, and also can account for observed changes in employment rates and wages after a minimum wage change. Flinn uses previous studies from the minimum wage literature to demonstrate how his model can be used to rationalize and synthesize the diverse results found in widely varying institutional contexts. He also shows how observed wage distributions from before and after a minimum wage change can be used to determine if the change was welfare-improving. More ambitiously, and perhaps controversially, Flinn proposes the construction and formal estimation of the model using commonly available data; model estimates then enable the researcher to determine directly the welfare effects of observed minimum wage changes. This model can be used to conduct counterfactual policy experiments--even to determine "optimal" minimum wages under a variety of welfare metrics. The development of the model and the econometric theory underlying its estimation are carefully presented so as to enable readers unfamiliar with the econometrics of point process models and dynamic optimization in continuous time to follow the arguments. Although most of the book focuses on the case where only the unemployed search for jobs in a homogeneous labor market environment, later chapters introduce on-the-job search into the model, and explore its implications for minimum wage policy. The book also contains a chapter describing how individual heterogeneity can be introduced into the search, matching, and bargaining framework.

    eISBN: 978-0-262-28939-9
    Subjects: Economics, Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. Preface
    (pp. xi-xiv)
  4. 1 Introduction
    (pp. 1-16)

    In this book my plan is to look at the minimum wage from a number of different perspectives. I will discuss the role it has played in the various theoretical models of the labor market in which it has been introduced. I will also attempt to assess its impact on unemployment and employment rates and the wage distribution, both using descriptive and model-based estimators. My argument will be that in assessing minimum wage impacts in the US context (or anywhere else, for that matter), in some point in the analysis it is important to have a behavioral framework in hand...

  5. 2 Descriptive Evidence on Minimum Wage Effects
    (pp. 17-34)

    This chapter provides some descriptive evidence on the impact of minimum wages on labor market outcomes. The purpose of the empirical exercises performed in this chapter is twofold. First, I want to focus the readerʹs attention on the impact of minimum wages at the disaggregate level. Card and Krueger (1995), among others, have convincingly argued that time series analyses performed at the macro level gloss over the distributional effects of minimum wage changes. In the United States, where federal minimum wages have typically been very low relative to the average wage in the market, it is not reasonable to expect...

  6. 3 A Model of Minimum Wage Effects on Labor Market Careers
    (pp. 35-72)

    The standard model used to theoretically and empirically investigate minimum wage effects on labor market outcomes views individuals and firms operating in stochastic environments that are governed by probabilistic laws that do not change over time. This is clearly an abstraction from reality, but for purposes of examining minimum wage effects, it may not be too egregious an assumption for a number of reasons. Most individuals paid the minimum wage are young, as we saw in the previous chapter, and as a result the impacts of minimum wage laws on labor market careers are largely concentrated in the first few...

  7. 4 Labor Market and Welfare Impacts of Minimum Wages
    (pp. 73-94)

    The model developed in the previous chapter is put to work in this chapter, allowing us to examine the manner in which a change in the statutory minimum wage affects equilibrium in the labor market, as well as on the welfare of agents on the supply and demand sides of the market. As is traditional in the minimum wage literature, we will be most concerned with how minimum wage changes affect employees and those looking for work. We begin this chapter by looking at how shifts in the minimum wage affect the unemployment rate and the accepted wage distribution. This...

  8. 5 Minimum Wage Effects on Labor Market Outcomes: A Selective Survey
    (pp. 95-116)

    In this chapter we have two goals. The first is to explore, in a very general way, the large volume of empirical research devoted to examining minimum wage impacts on labor market outcomes. After considering four of the surveys of the empirical literature on minimum wages, we will proceed to a reasonably detailed analysis of five studies. These studies were selected either because they focus on large or persistent changes in minimum wage rates at the national or regional level, or because they employ an innovative methodology in performing the empirical analysis.¹ In all cases the findings of the studies...

  9. 6 Assessing the Welfare Impacts of Actual Changes in the Minimum Wage
    (pp. 117-140)

    Using a formal model, such as the one we developed in chapter 3, allows the analyst to determine whether actual minimum wage changes result in welfare increases or decreases under a given welfare metric. The modeling choices made under our framework capture certain features of the wage distribution under a binding minimum wage constraint, and, most important, allow us to assess whether minimum wage changes have actually improved welfare.

    How can we can use information on observed labor market outcomes before and after minimum wage changes to determine the welfare impacts of these changes? There are two ways to approach...

  10. 7 Econometric Issues
    (pp. 141-166)

    Perhaps the most basic issue treated in applied econometrics exercises is that of identification.¹ Koopmans (1949, p. 132), who originated the term, described the concept as follows:

    In our discussion we have used the phrase ʺa parameter that can be determined from a sufficient number of observations.ʺ We shall now define this concept more sharply, and give it the nameidentifiabilityof the parameter.

    To discuss identification, one needs a model that is characterized in terms of some parameter set Γ, say, a data set, denoted byZN, and a class of estimators one is considering, which we will denote...

  11. 8 Model Estimates and Tests
    (pp. 167-184)

    The data used in performing the empirical work are described in detail in Chapter 2, along with associated descriptive statistics. The months used in the analysis are September 1996, February and August 1997, and January 1998. As was made clear in the previous chapter, identification of matching function parameters depends on our having access to CPS-ORG data at more than two points in time. For September 1996 we assume that the market was in a steady state equilibrium at the minimum wage $4.25, which was due to expire at the end of the month. When moving to the new steady...

  12. 9 Optimal Minimum Wages
    (pp. 185-194)

    In this chapter we use the estimates of the partial and general equilibrium versions of the model to determine the welfare, employment, and unemployment impacts of the minimum wage. We will begin by plotting the equilibrium steady state distribution of the population across labor market states—namely out of the labor force (OLF), unemployment, and employment—as a function of the minimum wage. The size of the employed population will be equal to the size of the set of firms with filled vacancies. We will also plot the average steady state values associated with each of the three labor market...

  13. 10 On-the-Job Search
    (pp. 195-228)

    All of our analysis to this point has focused on the situation where an individual must be unemployed to be considered for a job, an assumption that is, particularly in regard to the US labor market, highly counterfactual. In this chapter we extend our basic model to include on-the-job (OTJ) search. On the face of it, the change is extremely straightforward. We think of unemployed searchers encountering potential job matches at a constant rateλUwhen they are labor market participants (this rate was simply referred to asλabove when we didnʹt allow for search on the job). It...

  14. 11 Heterogeneity
    (pp. 229-260)

    In the models discussed to this point, we have for the most part neglected ʺobservableʺ heterogeneity within the population. By assuming that all agents inhabit the same labor market, the only source of heterogeneity we allowed was that generated by the timing and values of draws from the fixed productivity distributionG. In particular, we did not consider permanent differences among individuals in observed or unobserved characteristics, which are focal points in most empirical analyses of the impacts of minimum wages on employment outcomes. While there are some sound pragmatic reasons for imposing this strong homogeneity assumption, it is undoubtedly...

  15. 12 Conclusion
    (pp. 261-268)

    This chapter summarizes some of the key features and findings of the analysis we have performed and, at least as importantly, point to some of the most important limitations of our approach. Besides serving as a brief recap, we hope to point to possible extensions and elaborations of the model that could be of particular academic and policy interest.

    Not surprisingly, minimum wage policies, if imposed on ʺperfectʺ markets, cannot have beneficial impacts in terms of the efficient operation of the labor market. This finding, of course, applies to any potential policy intervention, not only minimum wages. For those advocating...

  16. Appendix: Proofs of Selected Propositions from Chapter 7
    (pp. 269-272)
  17. Notes
    (pp. 273-286)
  18. Bibliography
    (pp. 287-292)
  19. Index
    (pp. 293-306)