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Minimum Wage Notes

PPE Notes > Labour Economics: Minimum Wage Revision Notes

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Labour Economics Labour Economics: Minimum Wage Revision, Lecture Summary & Tutorial Summary-Overview Theoretical Effects: PC Model Theoretical Effects: Dynamic Monopsony Model Model Reconciliation: Empirics Literature Summary: o CARD AND KRUEGER (1995) o DOLADO et al (1996) o DOLTON & BONDIBENE (2012). o BAZEN's (1990) - general equilibrium approach Evidence in UK: o 1999 introduction o Blair New Deal o STEWART (2004) o LPC (2005) o METCALF (2007) Arguments in Favour of Minimum Wage Historical Policies in UK International Comparison Alternative Labour Market Policies & Economic Frameworks

- MW = 'lowest hourly, daily or monthly remuneration that employers may legally pay to workers'
- Primary intention: compressing wage inequality.
- Low pay = less than 2/3 median earnings. o Most common in UK/US. o Young workers, women, immigrants, less-skilled workers, part-time workers
- WERS: Average 69% of workplaces in private and public sector have no employees receiving rate equivalent to or less than NMW
- Controversy about impact and potential unintended consequences.
- Will depend on precise functioning:
- Level set at: varies. o 1970 KAITZ index (weighted average across industries of ratio of minimum wage to average wage) from 0.39 in US to 0.54 in Denmark. o UK: PS6.19/HR 21 and over o PS4.98/hr 18-30 o PS3.60/hr under 18 o PS2.60/hr for apprentices o France: 8.86 euros/hour. Automatically indexed against increase in CPI or increase in average earnings (whichever higher). 11% covered (highest in developed world) o US: not indexed. Set at federal level and by state. Federal level $7.25/hr or $15,000 a year if work full time. That's $8,000 short of the poverty threshold for a family of four
- How set: regionally (Canada, Japan); nationally (France, UK, Netherlands); industry (Portugal, Ireland, Spain)
- Should be understood in context of broader labour market Theoretical effects: PC model
- Card & Krueger (1995): 90% of economists believe increases unemployment. Traditional labour demand/labour supply: true If set above equilibrium price,

Labour Economics surplus of labour and unemployment so helps those whose wages rise but hurts

those who lose jobs. Maths:
- PC market o One type of labour o Production function Y = F(L,K) o Firm: price taker o Optimal labour input choice, conditional on given output: L = h(w,r,y) where r is price of nonlabour inputs o Assume CRS o Elasticity of conditional labour demand function with respect to wage: [?] =
-(1-a) s
o Where a = labour's share of total cost LTC o s = elasticity of substitution ES o [?] gives impact on firm level employment
- Criticism: o Too simple for many reasons. Ignores output response of firms affected by minimum wage. Expect firms to respond to rise in MC by lowering desired output level. o Ignores heterogeneity in labour force o Some employers exempt o Static - not clear what time period should occur. Doesn't account for potential LR impact through lower GDP growth/lower employment through reducing industries.
- Result also true in basic matching model. Rate of matches between unemployed workers and vacant positions; f(u, v). Increases in minimum wage lower tightness (ratio of unemployed workers to vacant positions) and raise unemployment. Key: separate discussion of negative effects of NMW (does it cause unemployment) and positive gains Theoretical effects: monopsony model
- Monopsony = monopolistic control of the demand for labour. Supply is less elastic.
- More accurate model: firms have some wage power. Market imperfections due to search costs, information costs, imperfect mobility, efficiency wage (C & K 1995)
- One buyer of labour, so SS of firm is supply function for market. Upward sloping.
- Monopsonist sets wage so MRP (labour demand) = MC
- Steep downward sloping D curve yields intersection with S/curve resulting in lower wage and lower employment. So appropriately set MW could increase wages and employment.
- Optimal level = marginal productivity of labour.

Labour EconomicsW and L are outcomes in monopsonistic market. W'' and L'' are wages with MW in monopsonistic labour market.

Card and Krueger's dynamic monopsony model based on efficiency wage argument. Pay high to obtain better workers. Not interested in bidding down process so can't bid way into high firm. Reason employer doesn't respond: scared of adverse selection and moral hazard. Adverse selection: goes back to workers and says pay for less otherwise others take jobs. If does so, some will leave, probably the best. Moral hazard: workers who accept treatment not happy - may have adverse productivity consequences on the company. May not be that workers deliberately do anything wrong, but morale suffers. May engage in sabotage. We then go back to our employer, realise what's going on and exploits us. Can't escape unless we leave our geographic area. Bit specific. Better argument for monopsony: limited supply responsiveness, eg. Mobility costs. 2/3 of low paid are married women. More liable to become victim if supply response is inelastic. Partial monopsony: get stuck with particular employer. So negiligible employment consequences. Expect monopsony element to diminish further up pay hierarchy you go. Liable to become victim of monopsonist if your supply responsiveness is limited for whatever reason - difficulties in leaving present employer. Topic links with stuff on gender v.well.
- Either way, model questions negative impact on employment. Government can impose MW between monopsony wage and MRP, w''. MC becomes horizontal and firm maximises profits at A with higher employment. However, MW still higher than competitive one, so AB = involuntary unemployment.
- CAVEAT: MW may not affect employment if demand for product is highly inelastic, since management passes on to consumers - see empirics. Reconcile models: empirics
- Differing conclusions. o Different time periods/regions o Methodological issues: how judge effect of wage change - in SR labour and capital fixed. MW never increased randomly. o Difference approaches
- CARD AND KRUEGER (1995): natural experiment o Impact of 18.8% increase in MW in New Jersey in 1992 and California

1998. Pennsylvania as control. o Results: negative employment impact is negative/non-existent. MW increases employment if wage low to start with. o Criticism:
? Phone calls (though later studies)
? DOLADO et al (1996): consumers of fast food not representative of population as whole o Regressions (though correlation not causation):
? Generally conclude MW has negligible impact on employment, except youth (eg DOLTON & BONDIBENE (2012). Eg. OECD: rise of

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