Elsevier

Journal of Public Economics

Volume 56, Issue 2, February 1995, Pages 245-255
Journal of Public Economics

The consequences of minimum wage laws Some new theoretical ideas

https://doi.org/10.1016/0047-2727(93)01411-3Get rights and content

Abstract

Economists generally agree that the effect of a binding minimum wage law is to move firms backward along the demand curve for low skill workers. However, this prediction of worker displacement depends critically on the assumption that the productivity of firms' labor is not dependent on the wage. In this paper we show that in a conventional efficiency wage model, a minimum wage may increase the level of employment in low wage jobs. The formal logic of our model is similar to the case of labor demand under monopsony, but arises in a model with a large number of employers.

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    Flinn (2006) finds that minimum wage hikes enhance workers' bargaining power and thus search activity, which may lead to higher price levels of labor. Minimum wage increases translate into the rising of the average and marginal cost of labor (Rebitzer and Taylor, 1995). In response to the exogenous shock to labor costs, firms attempt to reduce the quantity of labor demanded and alter the mix of labor employed.

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