The Economics of Wage Floors

Abstract

This paper contains a theoretical analysis of and summaries of empirical information on consequences of wage floors in the labor market imposed by minimum wages and by labor unions. Excess supplies are rationed in part probabilistically ("first come, first served"), and in part systematically -- by raising hiring standards, or by discrimination and nepotism. Effects on employment, unemployment, and labor force participation, and on wage differentials between the II covered'' and the free sector follow. Empirical information on these effects is cited in the minimum wage case, but only wage differentials are analyzed in the union context. Other consequences outlined here are: lengthening of school attendance, reduction of hours of work, substitution of paid out wages for fringes in the minimum wage case. However, union pressure on fringes is greater than on wages. This strategy produces larger income and greater job security for union members. The minimum wage reduces opportunities for job training and consequent wage growth. Quits initially decline as wages are pushed up, but turnover is likely to increase as the training content of jobs is reduced. Union wage and fringe advantages reduce quits significantly. However, training as well as wage growth are reduced.