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http://ssrn.com/abstract=226960
 
 

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Minimum Wage Effects and Low-Wage Labor Markets: A Disequilibrium Approach


David Neumark


University of California, Irvine - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)

William Wascher


Board of Governors of the Federal Reserve System - Division of Research and Statistics

January 1994

NBER Working Paper No. w4617

Abstract:     
We present a new approach to estimating minimum wage effects on employment. In contrast to most previous research, we account for the possibility that the relationship between minimum wages and employment depends on the magnitude of the minimum wage relative to the equilibrium wage in the absence of the legislated minimum. In particular, estimating the employment effects of binding minimum wages requires separation of sample observations into those that are on the labor demand curve but off the labor supply curve, and those that are at labor market equilibria. The paper implements an endogenous switching regression model with unknown sample separation that yields these estimates. The approach also yields estimates of the impact of labor market characteristics on the probability that minimum wages are binding. We also extend the disequilibrium approach to monopsony, which introduces a third regime, between the equilibrium monopsony wage and the equilibrium competitive wage, in which observations are on the labor supply curve but off the labor demand curve and minimum wages are therefore positively related to employment. Minimum wage effects under monopsony are estimated in a three-regime endogenous switching regression model with unknown regimes, and the monopsony characterization of low-wage labor markets is tested against the competitive characterization.

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Date posted: July 24, 2000  

Suggested Citation

Neumark, David and Wascher, William, Minimum Wage Effects and Low-Wage Labor Markets: A Disequilibrium Approach (January 1994). NBER Working Paper No. w4617. Available at SSRN: http://ssrn.com/abstract=226960

Contact Information

David Neumark (Contact Author)
University of California, Irvine - Department of Economics ( email )
3151 Social Science Plaza
Irvine, CA 92697-5100
United States
949-824-8496 (Phone)
949-824-2182 (Fax)
HOME PAGE: http://www.socsci.uci.edu/~dneumark/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
William Wascher
Board of Governors of the Federal Reserve System - Division of Research and Statistics ( email )
20th and C Streets, NW
Washington, DC 20551
United States
202-452-2812 (Phone)
202-452-3819 (Fax)
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