Minimum Wages Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

What are We Talking About? Unlike other institutions, MW acts on minima. It sets a wage floor. The first minimum wage was introduced in the United States in 1938 and paid 25 cents per hour. In 2007 the federal minimum wage was $5.85, in nominal terms 23 times larger, but, in real terms, only 1.4 times larger than 70 years ago. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Outline Cross-country comparisons Theory –A Competitive Labor Market –A Noncompetitive Labor Market Empirical evidence –Firm-level data –Natural Experiments –Workers’ Histories Policy issues: –Should it be increased or reduced? –Does it reduce poverty? Why Does a Minimum Wage Exist? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Types of Minimum Wages 1.National, government-legislated (perhaps after consultations with trade unions and employers’ associations). 2.National, outcome of collective bargaining agreements and extended to all workers. 3.Industry-level minimum resulting from industry-level collective bargaining and extended to all workers in that industry. Cross-country comparisons Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Within-country variation Cross-industry when set at the industry level. Cross regional when large differences in cost-of-living. Age dependent: sub.minima for youngsters acknowledging on the job training and returns to experience. Cross-country comparisons Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Measures Ratio of the Minimum Wage to the Median (or average) Wage. Coverage of the minimum wage: share of workers occupying jobs eligible for the MW. Kaitz Index: minimum wage as a proportion of the average wage adjusted by the industry-level coverage of the MW. Cross-country comparisons Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Problems with these Measures –Spillover effects. Increase in the minimum wage may raise the average wage leaving the MW/AveWa ratio unchanged. Also increase of MW may reduce wages in the uncovered segment (absorbing more low-skill workers) –Gross measure, but taxation is progressive –Earnings should not include bonuses and overtime premia –Which minwage (in Mexico 267!)? Cross-country comparisons Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons Minimum wage to average wage ratio Minimum wage DeterminationCoverage (1) (%) ( € per hour ) ( € per month ) PPPsettinglevel (4) Australia LNAT80 Austria CB-LSUB95 Belgium CBNAT90 Canada LSUB100 Czech Republic LNAT100 Denmark CB -80 Finland CBNAT90 France LNAT100 Germany CB -68 Greece LNAT100 Hungary LNAT100 Iceland CB - - Ireland CBNAT100 Italy CB -80 Japan LSUB100 (a) Korea Luxembourg LNAT100 (b) Netherlands LNAT100 (c ) New Zealand LNAT25 Poland LNAT100 Portugal LNAT100 Slovak Republic LNAT100 Spain LNAT100 Turkey L -100 United Kingdom LNAT100 (d) United States LSUB100

Historically Cross-country comparisons Figure 2.1 Ratio of Minimum to Median Wage Source: OECD Minimum Wage Database FranceUnited States

Countries with Bargaining Process

Countries with Government legislated MW

Countries with Consultation Process

Minum Wage to Average Wage

Summarizing Lower in US, Canada and Japan than in Europe New Members of the EU at the low end of the European MW distribution Asymmetries related to diverging historical developments (increasing in Europe, decreasing in the US) Cross-country comparisons Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory A Competitive Labor Market w w L0L0 L LsLs L1L1 w*w* LdLd u Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

w wmwm LmLm L LsLs L*L* w*w* LdLd mhc w wmwm LmLm L*L* w*w* LsLs LdLd L w L (w) Pure monopsonist Theory Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Measuring Monopsony Power Where ε denotes the inverse wage elasticity of labor supply and y(l) is the value of the marginal product of labor Theory Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Other cases in which the MW increases employment Modern monopsonies (Manning, 2003): many employers, but fewer vacancies to apply for. Efficiency wages: when imperfect monitoring of the productivity of workers, wage as a disciplining device; wage posting; trade-off economies of scale-diseconomies in monitoring; small firms good in monitoring; bad in efficiency; large firms the opposite. A minimum wage forces firms to grow larger (Rebizer and Taylor, 1995). Theory Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

When it increases productivity Supply side: as the productivity of a job depends on the investment in human capital (Cahuc and Michel 1996; Acemoglu and Pischke 1999). A minimum wage induces workers to acquire education in order not to be crowded out. Similar effect may arise on the demand side (Acemoglu 2001) because the minimum wage increases the number of vacancies for high- productivity jobs issued by employers. Theory Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Dual Labor Markets Theory w w L1L1 L LdLd L 0 s (w) L 1 s (w) Formal Sector w L Informal Sector w 0 w 1 L0L0 L1L1 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. L0L0 L0sL0s L1sL1s

Studies based on firm-level data Focus on fraction affected and spikes (Card, 1992; Card and Krueger, 1996; Flinn, 2008). Dolado et al. (1996): generally negative effects on employment, notably among youngsters. Informal sector: surprisingly positive effects on wages in the informal sector. A lighthouse effect? Empirical evidence Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Studies based on natural experiments Stewart (1994): effect of the introduction of a MW in the UK Comparison of employment outcomes of individuals just above the MW and higher up the wage distribution (1st difference) before and after (2nd difference) the introduction of the minimum wage. No adverse effect of the introduction of the minimum wage in Britain found for any of the demographic groups considered Empirical evidence Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Card & Krueger (1994) Impact of increases in the minimum wage in New Jersey (treatment group) in April 1992 from $4.25 to $5.05. Control group: Pennsylvania, where the minimum wage remained at $4.25 throughout this period. New Jersey and Pennsylvania are bordering states with similar economic structures Data on employment in 410 fast-foods in the two states in March 1992 (before the MW hike) and in December (after). Empirical evidence Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

“Difference-in-Difference” estimators If the employment in the State i is determined by an equation of this type: Li=wi+XiγLi=wi+Xiγ where w i is the level of the minimum wage and Xi contains all the other variables which influence L i. If we have two observations which refer to two dates for the same State, so:  L i =L i2 –L i1 =  (w i2 - w i1 )+ (X i2 - X i1 ) γ Empirical evidence Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

If we have also data for another State j which is identical to i in each characteristic except for w,which is not changed, so:  Li-  L j =  (w i2 - w i1 ) In our case, if we think that NJ e PA are enough similar, we can obtain an estimation of  simply calculating the difference of the difference! “Difference-in-Difference” estimators (2) “Difference-in-Difference” estimators (2) Empirical evidence Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Diff-Diff estimation: results  L NJ -  L PA =0.29-(-2.01)=2.30*  = (  L NJ -  L PA )/ (  w NJ )=2.30 / 0.8 =2.875* (an increase of $1 of wi creates more employees !) The increase of the minimum wage has increased the number of employees! It’s really a surprise: we usually think that the labor market of the American fast-food is competitive…or is it monopsonistic? Empirical evidence Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Studies based on workers histories Since the late 1990s, work combining data on workers and firms (matched employee-employer micro data) Focus on the economy as a whole and on the effects on employment and hours Abowd et al. (1999):increase in MW by 1% in France reduces probability of men (women) keeping a job at the MW by 1% (1,3%) Portugal and Cardoso (2001): increase by 50% of MW in Portugal reduced hirings but increased job retention (wage posting story?) Empirical evidence Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Policy issues Should the MW be increased or reduced? Does a minimum wage increase or reduce poverty? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Policy Analysis

Why Does a MW exist? 1.Efficiency: remedies market failures, e.g. deriving from excessive monopsonistic power, and informational aymmetries that give rise to moral hazard and adverse selection problems. 2.Equity: reduces earnings inequality by supporting incomes of low-earning, workers, for example, low-skilled workers. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. Policy Analysis

Review questions What is the Kaitz index? What are the pros and cons of this measure of the minimum wage? Why are there so few workers earning the minimum wage? Why are minimum wages typically age dependent? When does a minimum wage increase employment? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Why, in your view, has an increase in the minimum wage been found to increase wages also in the uncovered (informal) sector? When does a minimum wage increase welfare, although not necessarily employment? How does a minimum wage affect poverty? Who supports the presence of the minimum wage? Why did Card and Krueger study the fast-food industry? Review questions (2) Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-ref. other chapters How to mitigate adverse effects of the MW on employment? Wage-subsidies or employment conditional incentives → Chapter 5 How about spillovers of the MW over the entire wage distribution? Collective bargaining and unions → Chapter 3 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Practicing with real data Box 2.2: Effects of MinimumWage Hikes in the U.S. Fast-Food Industry (pages 40-43) A Stata data file with the Card and Krueger (1994) dataset, a do file and a log file are available at the website: Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.