Product Market Evidence on the Employment Effects of the Minimum Wage

43 Pages Posted: 30 Nov 2003

See all articles by Eric French

Eric French

Department of Economics; Institute for Fiscal Studies (IFS)

Daniel Aaronson

Federal Reserve Bank of Chicago

Date Written: November 2003

Abstract

We calibrate a model of labor demand to infer the employment response to a change in the minimum wage in the food away from home industry. Assuming a perfectly competitive labor market, the model predicts a 2.5 to 3.5 percent fall in employment in response to a 10 percent minimum wage change. We then introduce monopsony power in local labor markets. We identify the extent of monopsony power using information on the degree to which minimum wage cost shocks are passed on to consumers in the form of higher prices. Whereas the competitive model implies that employment falls and prices rise in response to an increase in the minimum wage, the monopsony model potentially implies that employment can rise and prices fall in response to an increase in the minimum wage. Previous research shows that prices rise in response to an increase in the minimum wage. We show that this price response is consistent with the prediction of the competitive model. Calibrating the full model, we can place fairly tight bounds on the elasticity of demand for labor with the most plausible parameter values suggesting a 2 to 3 percent loss in employment in reaction to a 10 percent increase in the minimum wage.

Keywords: minimum wage, employment, prices, monopsony

JEL Classification: D4, J3, J4

Suggested Citation

French, Eric and Aaronson, Daniel, Product Market Evidence on the Employment Effects of the Minimum Wage (November 2003). Available at SSRN: https://ssrn.com/abstract=473191 or http://dx.doi.org/10.2139/ssrn.473191

Eric French (Contact Author)

Department of Economics ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Daniel Aaronson

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States

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