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The Behavioral Effects of Minimum Wages


Armin Falk


Institute for the Study of Labor (IZA); University of Bonn - Economic Science Area; CESifo (Center for Economic Studies and Ifo Institute)

Ernst Fehr


University of Zurich - Department of Economics

Christian Zehnder


University of Lausanne

June 2005

IZA Discussion Paper No. 1625

Abstract:     
The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

Number of Pages in PDF File: 35

Keywords: minimum wages, labor market, monopsony, fairness, reservation wages, entitlement

JEL Classification: C91, D63, E64, J38, J42, J58, J68

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Date posted: June 8, 2005  

Suggested Citation

Falk, Armin and Fehr, Ernst and Zehnder, Christian, The Behavioral Effects of Minimum Wages (June 2005). IZA Discussion Paper No. 1625. Available at SSRN: http://ssrn.com/abstract=738323

Contact Information

Armin Falk (Contact Author)
Institute for the Study of Labor (IZA) ( email )
P.O. Box 7240
Bonn, D-53072
Germany
University of Bonn - Economic Science Area
Adenauerallee 24-42
D-53113 Bonn
Germany
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Ernst Fehr
University of Zurich - Department of Economics ( email )
Blümlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)
Christian Zehnder
University of Lausanne ( email )
Lausanne, 1015
Switzerland
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