Minimum Wages Source Tito Boeri and Jan van

Minimum Wages Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

What are We Talking About? • Unlike other institutions, MW acts on minima. It sets a wage floor. • The first minimum wage was introduced in the United States in 1938 and paid 25 cents per hour. In 2007 the federal minimum wage was $5. 85, in nominal terms 23 times larger, but, in real terms, only 1. 4 times larger than 70 years ago. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Outline • Cross-country comparisons • Theory – A Competitive Labor Market – A Noncompetitive Labor Market • Empirical evidence – Firm-level data – Natural Experiments – Workers’ Histories • Policy issues: – Should it be increased or reduced? – Does it reduce poverty? • Why Does a Minimum Wage Exist? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons Types of Minimum Wages 1. National, government-legislated (perhaps after consultations with trade unions and employers’ associations). 2. National, outcome of collective bargaining agreements and extended to all workers. 3. Industry-level minimum resulting from industry-level collective bargaining and extended to all workers in that industry. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons Within-country variation • Cross-industry when set at the industry level. • Cross regional when large differences in cost-of-living. • Age dependent: sub. minima for youngsters acknowledging on the job training and returns to experience. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons Measures • Ratio of the Minimum Wage to the Median (or average) Wage. • Coverage of the minimum wage: share of workers occupying jobs eligible for the MW. • Kaitz Index: minimum wage as a proportion of the average wage adjusted by the industry -level coverage of the MW. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons Problems with these Measures – Spillover effects. Increase in the minimum wage may raise the average wage leaving the MW/Ave. Wa ratio unchanged. Also increase of MW may reduce wages in the uncovered segment (absorbing more low-skill workers) – Gross measure, but taxation is progressive – Earnings should not include bonuses and overtime premia – Which minwage (in Mexico 267!)? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-country comparisons Minimum wage to average wage ratio Minimum wage (1) (%) ( € per hour ) ( € per month ) PPP setting level (4) 49 7. 25 1277 L NAT 80 Austria CB-L SUB 95 Belgium 43 6. 93 1220 CB NAT 90 Canada 35 4. 75 836 L SUB 100 Czech Republic 39 1. 58 278 L NAT 100 Denmark CB - 80 Finland CB NAT 90 France 52 7. 51 1322 L NAT 100 CB - 68 Greece 48 3. 29 578 L NAT 100 Hungary 38 1. 28 225 L NAT 100 Iceland CB - - Ireland 53 7. 43 1308 CB NAT 100 CB - 80 Japan 40 4. 15 731 L SUB 100 (a) Korea 27 2. 64 464 - - 10 Luxembourg 41 8. 50 1389 L NAT 100 (b) Netherlands 39 7. 30 1284 L NAT 100 (c ) New Zealand 48 4. 98 877 L NAT 25 Poland 40 1. 35 237 L NAT 100 Portugal 53 2. 08 366 L NAT 100 Spain 40 3. 40 599 L NAT 100 Turkey 37 2. 78 489 L - 100 United Kingdom 39 6. 40 1127 L NAT 100 (d) United States 31 3. 48 613 L SUB 100 Australia Germany Italy Slovak Republic Determination Coverage

Cross-country comparisons Historically 70 60 50 40 30 20 10 0 1965 1970 1975 France 1980 1985 1990 1995 United States Figure 2. 1 Ratio of Minimum to Median Wage Source: OECD Minimum Wage Database. 2000 2005

Countries with Bargaining Process

Countries with Government legislated MW

Countries with Consultation Process

Minum Wage to Average Wage

Cross-country comparisons Summarizing • Lower in US, Canada and Japan than in Europe • New Members of the EU at the low end of the European MW distribution • Asymmetries related to diverging historical developments (increasing in Europe, decreasing in the US) Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory A Competitive Labor Market w Ls u w w* Ld L 0 L 1 L Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory Pure monopsonist mhc w w Ls Ls w* wm wm Ld Lm L* L Ld Lm L(w) L* Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. L

Theory Measuring Monopsony Power Where ε denotes the inverse wage elasticity of labor supply and y(l) is the value of the marginal product of labor Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory Other cases in which the MW increases employment • Modern monopsonies (Manning, 2003): many employers, but fewer vacancies to apply for. • Efficiency wages: when imperfect monitoring of the productivity of workers, wage as a disciplining device; wage posting; trade-off economies of scale -diseconomies in monitoring; small firms good in monitoring; bad in efficiency; large firms the opposite. A minimum wage forces firms to grow larger (Rebizer and Taylor, 1995). Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory When it increases productivity • Supply side: as the productivity of a job depends on the investment in human capital (Cahuc and Michel 1996; Acemoglu and Pischke 1999). A minimum wage induces workers to acquire education in order not to be crowded out. • Similar effect may arise on the demand side (Acemoglu 2001) because the minimum wage increases the number of vacancies for highproductivity jobs issued by employers. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Theory Dual Labor Markets Formal Sector Informal Sector L 1 s(w) w L 0 s(w) w w L 0 s L 1 s L 0 L 1 w 0 w 1 Ld L 1 L 0 L Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press. L

Empirical evidence Studies based on firm-level data • Focus on fraction affected and spikes (Card, 1992; Card and Krueger, 1996; Flinn, 2008). • Dolado et al. (1996): generally negative effects on employment, notably among youngsters. • Informal sector: surprisingly positive effects on wages in the informal sector. A lighthouse effect? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence Studies based on natural experiments • Stewart (1994): effect of the introduction of a MW in the UK • Comparison of employment outcomes of individuals just above the MW and higher up the wage distribution (1 st difference) before and after (2 nd difference) the introduction of the minimum wage. • No adverse effect of the introduction of the minimum wage in Britain found for any of the demographic groups considered Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence Card & Krueger (1994) • Impact of increases in the minimum wage in New Jersey (treatment group) in April 1992 from $4. 25 to $5. 05. • Control group: Pennsylvania, where the minimum wage remained at $4. 25 throughout this period. • New Jersey and Pennsylvania are bordering states with similar economic structures • Data on employment in 410 fast-foods in the two states in March 1992 (before the MW hike) and in December (after). Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence

Empirical evidence “Difference-in-Difference” estimators • If the employment in the State i is determined by an equation of this type: Li= wi+Xiγ where wi is the level of the minimum wage and Xi contains all the other variables which influence Li. If we have two observations which refer to two dates for the same State, so: Li=Li 2 –Li 1 = (wi 2 - wi 1)+ (Xi 2 - Xi 1) γ Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence “Difference-in-Difference” estimators (2) • If we have also data for another State j which is identical to i in each characteristic except for w, which is not changed, so: Li- Lj= (wi 2 - wi 1) In our case, if we think that NJ e PA are enough similar, we can obtain an estimation of simply calculating the difference of the difference! Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence Diff-Diff estimation: results LNJ - LPA=0. 29 -(-2. 01)=2. 30* a = ( LNJ - LPA )/ ( w. NJ)=2. 30 / 0. 8 =2. 875* (an increase of $1 of wi creates 2. 875 more employees !) The increase of the minimum wage has increased the number of employees! It’s really a surprise: we usually think that the labor market of the American fast-food is competitive…or is it monopsonistic? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Empirical evidence Studies based on workers histories • Since the late 1990 s, work combining data on workers and firms (matched employee-employer micro data) • Focus on the economy as a whole and on the effects on employment and hours • Abowd et al. (1999): increase in MW by 1% in France reduces probability of men (women) keeping a job at the MW by 1% (1, 3%) • Portugal and Cardoso (2001): increase by 50% of MW in Portugal reduced hirings but increased job retention (wage posting story? ) Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Policy Analysis Policy issues • Should the MW be increased or reduced? • Does a minimum wage increase or reduce poverty? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Policy Analysis Why Does a MW exist? 1. Efficiency: remedies market failures, e. g. deriving from excessive monopsonistic power, and informational aymmetries that give rise to moral hazard and adverse selection problems. 2. Equity: reduces earnings inequality by supporting incomes of low-earning, workers, for example, low-skilled workers. Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Review questions • What is the Kaitz index? What are the pros and cons of this measure of the minimum wage? • Why are there so few workers earning the minimum wage? • Why are minimum wages typically age dependent? • When does a minimum wage increase employment? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Review questions (2) • Why, in your view, has an increase in the minimum wage been found to increase wages also in the uncovered (informal) sector? • When does a minimum wage increase welfare, although not necessarily employment? • How does a minimum wage affect poverty? • Who supports the presence of the minimum wage? • Why did Card and Krueger study the fast-food industry? Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Cross-ref. other chapters • How to mitigate adverse effects of the MW on employment? Wage-subsidies or employment conditional incentives → Chapter 5 • How about spillovers of the MW over the entire wage distribution? Collective bargaining and unions → Chapter 3 Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

Practicing with real data • Box 2. 2: Effects of Minimum. Wage Hikes in the U. S. Fast-Food Industry (pages 40 -43) • A Stata data file with the Card and Krueger (1994) dataset, a do file and a log file are available at the website: http: //www. frdb. org/images/customer/card. zip Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.