Friday, June 18, 2010

Expectations and the employment effect of minimum wages

On financial markets, it is well known that anticipated changes in policy interest rates have little impact because they have already been priced in. The role of anticipations is very important in the price of any forward-looking goods, a phenomenon that can go beyond financial markets.

Sara Polini applies this idea to labor markets and specifically to the anticipation of movements in the minimum wage. She builds a search and matching model and applies it to Spain where minimum wage changes are usually anticipated, but occasionally not, like after the 2004 terrorist attack that lead to a surprise Socialist government. Anticipated changes lead to a reduction in employment, while unanticipated ones do not. This reconciles the ambiguous and inconclusive results in the literature, which ignored whether changes were anticipated or not.


Anonymous said...

Wow, you mean that economic theory is actually useful for understanding the economy and not just torturing PhD students?! There's more to applied economics than IV and DiDiD? ---

Presumably unanticipated changes will have to be "adjusted for" eventually too.

blissettluther said...
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