Working Paper: NBER ID: w26378
Authors: C. Y. Kelvin Yuen; Ping Wang
Abstract: While minimum wage policy is widely adopted in the real world, can it effectively raise the average wage of lower paid jobs without having large detrimental consequences for employment? The empirical literature fails to establish robust findings. We develop a general-equilibrium search and wage-posting framework with heterogeneous workers and tasks matching in multi-tier labor markets: abstract, routine high-skilled, routine middle-skilled, manual middle-skilled and manual low-skilled. We incorporate rich cross-market spillovers and compositional effects from individual responses to market thickness. As a result of minimum wage hikes, we show that (i) the unemployment rate at the minimum wage binding market is higher, while all other markets enjoy a lower unemployment rate; (ii) employment in the manual low-skilled jobs is lower, whereas employment in the routine high-skilled and manual middle-skilled markets is higher due to cross-market substitutions; and, (iii) employment in other markets has ambiguous responses due to conflicting effects on potential worker entry and unemployment. By calibrating the model to fit the U.S. data, we evaluate the impacts of the federal minimum wage hike (2007-2009) and the on-going minimum wage increase in Seattle (2017-2021). We find that the minimum wage effects on employment on the binding markets depend crucially on the magnitudes of spillover and compositional effects and that the employment effects may be weak in a nonbinding market. Moreover, our results suggest that, while both minimum wage hikes reduce aggregate output, they only generate small effects on submarket average and overall average wages.
Keywords: Minimum Wage; Labor Market; Employment; Wage Distribution; General Equilibrium
JEL Codes: D83; E24; E60; J64
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Minimum wage increases (J38) | higher unemployment rate in the minimum wage binding market (F66) |
| Minimum wage increases (J38) | lower unemployment rate in all other markets (F66) |
| Minimum wage increases (J38) | decline in employment in manual low-skilled jobs (F66) |
| Minimum wage increases (J38) | increase in employment in routine high-skilled markets (F66) |
| Minimum wage increases (J38) | increase in employment in manual middle-skilled markets (F66) |
| Minimum wage increases (J38) | ambiguous employment effects in abstract and routine middle-skilled markets (J29) |
| Minimum wage increases (J38) | reduce aggregate output (E23) |
| Minimum wage increases (J38) | small effects on submarket average wages (J31) |
| Minimum wage increases (J38) | small effects on overall average wages (J31) |