Working Paper: NBER ID: w0653
Authors: Herschel I. Grossman
Abstract: This paper considers the possible employment effects of reforming minimum-wage policy to incorporate indexation of the nominal minimum wage .The analysis assumes that both the demand for the labor services of minimum-wage workers and the setting of the nominal minimum wage rate under existing policy depend in part on rational expectations of future average wage rates. The analysis implies that, if the indexation ratio of the nominal minimum wage to the recent-past average wage rate were large relative both to the level and trend of the expected rate of average wage inflation and to the existing relative minimum-wage target, indexation would decrease the average level over time of minimum-wage employment. The analysis also implies that, if the year-to-year variation in expected wage inflation were large relative to the year-to-year variation in unexpected wage inflation, indexation would increase the year-to-year variation in minimum-wage employment.
Keywords: Minimum wage; Indexation; Rational expectations; Labor market
JEL Codes: J38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| indexation ratio of the nominal minimum wage to recent average wage rates (J38) | minimum wage employment (J38) |
| year-to-year variation in expected wage inflation (J39) | minimum wage employment variation (J38) |