Job and Wage Mobility in a Search Model with Non-Compliance (Exemptions) with the Minimum Wage

41 Pages Posted: 25 Apr 2006

See all articles by Zvi Eckstein

Zvi Eckstein

The Interdisciplinary Center (IDC); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Suqin Ge

Virginia Tech - Department of Economics

Barbara Petrongolo

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Date Written: April 2006

Abstract

How well does a simple search on-the-job model fit the eighteen years of job and wage mobility of high school graduates? To answer this question we are confronted from the data with a prevalent non-compliance and exemptions from the minimum wage. We incorporate this observation in a job search model with three main ingredients: (i) search on-the-job; (ii) minimum wages, with potentially imperfect compliance or exemptions; and, (iii) exogenous wage growth on-the-job. We use panel data drawn from the NLSY79, US youth panel starting in 1979, to estimate the parameters of our simple job search model and, in particular, the extent of non-compliance/exemptions to the minimum wage. The model is solved numerically and we use simulated moments to estimate the parameters. The estimated parameters are consistent with the model and they provide a good fit for the observed levels and trends of the main job and wage mobility data. Furthermore, the estimated model indicates that the non-compliance and exemption rate with the federal minimum wage translates into a roughly 10% of jobs paying less than the minimum wage. Counterfactual experiment of increase of the compliance/non-exemption rate or the minimum wage shows a small effect on mean accepted wages but a significant negative effect on the non-employment rate.

Keywords: minimum wages, compliance, exemptions, job search, wage growth

JEL Classification: J42, J63, J64

Suggested Citation

Eckstein, Zvi and Ge, Suqin and Petrongolo, Barbara, Job and Wage Mobility in a Search Model with Non-Compliance (Exemptions) with the Minimum Wage (April 2006). IZA Discussion Paper No. 2076. Available at SSRN: https://ssrn.com/abstract=898571

Zvi Eckstein

The Interdisciplinary Center (IDC) ( email )

P. O. Box 167
Herzliya, 69978, PA Pennsylvania 46150
United States
+972 9 9602706 (Phone)
+972 9 9602758 (Fax)

HOME PAGE: http://www1.idc.ac.il/Faculty/Eckstein/index.html

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

Suqin Ge

Virginia Tech - Department of Economics ( email )

Department of Economics
Virginia Tech
Blacksburg, VA 24061
United States

Barbara Petrongolo (Contact Author)

London School of Economics & Political Science (LSE) - Centre for Economic Performance (CEP) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7799 (Phone)
+44 20 7955 7595 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

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

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