Minimum Wage Effects on Labor Market Outcomes Under Search with Bargaining

60 Pages Posted: 15 Dec 2003

See all articles by Christopher J. Flinn

Christopher J. Flinn

New York University -Leonard N. Stern School of Business - Department of Economics; IZA Institute of Labor Economics

Date Written: December 2003

Abstract

Building upon a continuous-time model of search with Nash bargaining in a stationary environment, we analyze the effect of changes in minimum wages on labor market outcomes and welfare. While minimum wage increases invariably lead to employment losses in our model, they may be welfare-improving to labor market participants using any one of a number of welfare criteria. A key determinant of the welfare impact of a minimum wage increase is the Nash bargaining power parameter. We discuss identification of this model using Current Population Survey data on accepted wages and unemployment durations, and demonstrate that key parameters are not identified when the distribution of match values belongs to a location-scale family. By incorporating a limited amount of information from the demand side of the market, we are able to obtain credible and precise estimates of all primitive parameters, including bargaining power. Direct estimates of the welfare impact of the minimum wage increase from $4.25 to $4.75 in 1996 provide limited evidence of a small improvement. Using estimates of the primitive parameters we show that more substantial welfare gains for labor market participants could have been obtained by doubling the minimum wage rate in 1996, though at the cost of a perhaps unacceptably high unemployment rate.

Keywords: minimum wages, matching models, Nash bargaining

JEL Classification: C34, C51, J41, J38

Suggested Citation

Flinn, Christopher J., Minimum Wage Effects on Labor Market Outcomes Under Search with Bargaining (December 2003). IZA Discussion Paper No. 949. Available at SSRN: https://ssrn.com/abstract=477461

Christopher J. Flinn (Contact Author)

New York University -Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
174
Abstract Views
1,963
rank
180,991
PlumX Metrics