Working Paper: CEPR ID: DP17026
Authors: Yujiang River Chen; Coen N. Teulings
Abstract: The extensive literature on minimum wages has found evidence for the compression of relativewages and mixed results for employment. This literature has been plagued by a numberof problems. First, the median-minimum wage ratio is used as the independent variable, wherethe median is endogenous. Second, it is difficult to disentangle compression of relative wagesand truncation due to employment effects. Third, all effects are likely to depend on the initiallevel of the minimum. Fourth, employment effects are likely to differ between worker types.We offer solutions for these problems, by using instruments for the median, by using data onpersonal characteristics, and by using a flexible specification. We apply our method to US datastarting from 1979, allowing for a wide variation in minimum wages. We find strong compressionand positive employment effects for the lower half of the distribution, persisting for quitehigh levels of the minimum.
Keywords: minimum wages; US; employment effects; wage dispersion; wage share
JEL Codes: J31; J58; R12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in the minimum wage (J38) | strong wage compression for workers in the lower half of the wage distribution (J31) |
| increase in the minimum wage (J38) | significant positive employment effects (J68) |
| increase in the spike of the minimum wage (J38) | return to human capital for the median worker decreases (J24) |
| increase in the spike of the minimum wage (J38) | return to human capital for workers earning just above the minimum wage decreases (J24) |
| spike of 10% (E32) | total employment is maximized (J68) |
| lower-skilled workers (J69) | benefit from increased minimum wages (J38) |
| higher-skilled workers (J24) | may experience negative impact from increased minimum wages (F66) |