Working Paper: NBER ID: w4742
Authors: Richard Dickens; Stephen Machin; Alan Manning
Abstract: Recent work on the economic effects of minimum wages has stressed that the standard economic model, where increases in minimum wages depress employment, is not supported by the empirical findings in some labour markets. In this paper we present a theoretical framework which is general enough to allow minimum wages to have the conventional negative impact on employment, but which also allows for the possibility of a neutral or a positive effect. The model structure is based on labour market frictions which give employers some degree of monopsony power. The formulated model has a number of empirical implications which we go on to test using data on industry-based minimum wages set by the UK Wages Councils between 1975 and 1990. Some strong results emerge: minimum wages significantly compress the distribution of earnings and, contrary to conventional economic wisdom but in line with several recent studies, do not have a negative impact on employment. If anything, the relationship between minimum wages and employment is estimated to be positive.
Keywords: minimum wages; employment; labor market; UK
JEL Codes: J38; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| minimum wages (J38) | compression of the distribution of earnings (D39) |
| minimum wages (J38) | employment (J68) |
| minimum wages (J38) | increase in employment (for small changes) (J23) |
| theoretical model based on monopsony power (J42) | minimum wages can raise employment levels (J38) |
| minimum wages (J38) | spike in wage distributions at the minimum wage (J31) |