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

42 Pages Posted: 24 Jul 2000  

David Neumark

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

William Wascher

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

Date Written: January 1994

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.

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: https://ssrn.com/abstract=226960

David Neumark (Contact Author)

University of California, Irvine - Department of Economics ( email )

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HOME PAGE: http://www.socsci.uci.edu/~dneumark/

National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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William Wascher

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

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Washington, DC 20551
United States
202-452-2812 (Phone)
202-452-3819 (Fax)

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