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The Behavioral Effects of Minimum Wages

35 Pages Posted: 8 Jun 2005  

Armin Falk

IZA Institute of Labor Economics; University of Bonn - Economic Science Area; CESifo (Center for Economic Studies and Ifo Institute)

Ernst Fehr

University of Zurich - Department of Economics

Christian Zehnder

University of Lausanne

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

Keywords: minimum wages, labor market, monopsony, fairness, reservation wages, entitlement

JEL Classification: C91, D63, E64, J38, J42, J58, J68

Suggested Citation

Falk, Armin and Fehr, Ernst and Zehnder, Christian, The Behavioral Effects of Minimum Wages (June 2005). IZA Discussion Paper No. 1625. Available at SSRN: https://ssrn.com/abstract=738323

Armin Falk (Contact Author)

IZA Institute of Labor Economics ( email )

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

University of Bonn - Economic Science Area

Adenauerallee 24-42
D-53113 Bonn
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Ernst Fehr

University of Zurich - Department of Economics ( email )

Bl├╝mlisalpstrasse 10
Zuerich, 8006
Switzerland
+41 1 634 3709 (Phone)
+41 1 634 4907 (Fax)

Christian Zehnder

University of Lausanne ( email )

Lausanne, Vaud CH-1015
Switzerland

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