Friday, October 24, 2008

The minimum wage lowers wages

We have all heard about the controversy whether minimum wages increase or decrease low-wage employment. But what is its effect on wages? Presumably, the idea of the minimum wage is to raise the lowest wages to a level that makes them living wages. What about the other wages?

Natalya Shelkova suggests that the workers with productivities not much higher that the minimum wages get their wage depressed to the minimum wage. The reason is that the minimum wage acts like a coordination device for employers who thus implicitly collude to offer lower wages. Empirically, she shows that this happens more in states that follow the federal minimum wage, as well as at times where the minimum wages has not been changed for a long time. This implies that introducing a minimum wage reduces wages, at least for those who had wages reasonably close to this new minimum. However, increasing an existing minimum wage raises wages.

The reasoning is similar to that of Christopher Knittel and Victor Stango for credit card interest rates. Once maximum rates were defined by state laws, financial institutions quickly converged to those rates which then not only were maximum rates, but also median rates. It shows that sometimes good intentions can backfire.

NB: I will traveling next week, so I may not be able to post every day, if any.

4 comments:

Vilfredo said...

Germany is currently debating the introduction of a minimum wage, with a strong support from unions. If we are to believe this paper, they should reconsider this ASAP.

Kansan said...

If I recall correctly, a similar argument was made (by unions?) when the law instituting the federal minimum wage was debated.

Labor economist said...

I saw this paper presented at the SOLE meetings. Very intriguing, and the empirics look solid. But I would really want to see some big name looking at this before making a definitive judgment.

Anonymous said...

David Card has discussed the paper at a workshop organized by Princeton last week-end. Anybody have an idea what was said?