Setting the Minimum Wage
Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)
IZA Discussion Paper No. 4335
The process leading to the setting of the minimum wage so far has been fairly overlooked by economists. This paper suggests that this is a serious limitation as the setting regime contributes to explain cross-country variation in the fine-tuning of the minimum wage, hence in the way in which the trade-off between reducing poverty among working people and shutting down low productivity jobs is addressed. There are two common ways of setting national minimum wages: they are either government legislated or are the outcome of collective bargaining agreements, which are extended erga omnes to all workers. We develop a simple model relating the level of the minimum wage to the setting regime. Next, we exploit a new data set on minimum wages in 66 countries that had already or introduced a minimum wage in the period 1981-2005 to test the implications of the model. We find that a Government legislated minimum wage is lower than a wage floor set within collective agreements. This effect survives to several robustness checks and hints at a causal relation between the setting regime and the level of the minimum wage.
Number of Pages in PDF File: 30
Keywords: minimum wages, collective bargaining, statutory minimum
JEL Classification: J31, J41, J42
Date posted: August 4, 2009
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