The Consequences of Minimum Wage Laws: Some New Theoretical Ideas

24 Pages Posted: 31 Jul 2007 Last revised: 11 Aug 2010

See all articles by James B. Rebitzer

James B. Rebitzer

Boston University School of Management; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics; Bard College - The Levy Economics Institute

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management

Date Written: October 1991

Abstract

Economists generally agree that the immediate and direct effect of a binding minimum wage law is to move firms backward along the demand curve for low skill workers. However, this prediction of worker displacement depends critically on a model of firm behavior that abstracts from problems of work incentives. In this paper we re-examine the theoretical basis for the consensus view of minimum wage laws. The central finding is that when firms use the threat of dismissal to elicit high levels of work effort, an increase in the minimum wage may have the immediate and direct effect of increasing the level of employment in low wage jobs. The formal logic of our model is similar to that found in the model of labor demand under monopsony. However, unlike the monopsony model, the positive employment effect of the minimum wage emerges in a labor market comprised of a large number of firms competing for the labor services of identical workers.

Suggested Citation

Rebitzer, James B. and Taylor, Lowell J., The Consequences of Minimum Wage Laws: Some New Theoretical Ideas (October 1991). NBER Working Paper No. w3877. Available at SSRN: https://ssrn.com/abstract=473994

James B. Rebitzer (Contact Author)

Boston University School of Management ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
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617 353 4605 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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IZA Institute of Labor Economics

P.O. Box 7240
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Bard College - The Levy Economics Institute

Blithewood
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United States

Lowell J. Taylor

Carnegie Mellon University - H. John Heinz III School of Public Policy and Management ( email )

Pittsburgh, PA 15213-3890
United States
412-268-3278 (Phone)
412-268-7036 (Fax)

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