Minimum Wage

DID

Difference in Difference: Naturally, we use the randomised control trial (RCT) to analyze questions in natural science, but it is impractical for Minimum Wage.

Lecture 2

Standard view:

• Minimum Wage reduces employment

Consider the market for low-wage labour, with the $W^{\ast }$ as the equilibrium wage. if we bind the minimum wage at wage $W^{min}>W^{\ast }$, what will happen is the labour demand would decreases to $L^{min}$. However, the labours would consider the higher wage, so the supply is also getting higher in this case, creating the labour supply $L^{{}^{\prime }}$, so the unemployment goes up to $L^{{}^{\prime }}-L^{min}$

Question 5.1: How would the introduction of a minimum wage affect the employment and wages of skilled (= high wage) workers? What about workers in an informal sector where the minimum wage doesn’t apply?

Answer: within the framework of the standard model, effect on employment is ambiguous, combination of

• Substitution Effect
• Scale Effect

And the effect on wages depends on the employment effect.

Question 5.2: According to the Hicks-Marshall law of derived demand, which four factors affect the employment response to a minimum wage increase?

The size of the reduction depends on substitution and scale effects.

The papers discuss last week generally focus on a particular city/industry.

Empirical studies show little negative employment effects, Which, in this environment, means demand for low-wage labour is inelastic

• Elasticity of factor substitution (substitution effect)

Firms can’t easily substitute other factors for low-wage labour (eg fixed technology, regulations)

Putty-clay model

• Elasticity of supply of other factors (substitution effect)

Supply of capital is inelastic, making it costly to substitute

• Price elasticity of (product) demand (scale effect)

Product demand is inelastic; higher factor prices can be passed on as higher product prices

• Factor share in total costs (scale effect)

Low-wage labour is a small share of total costs; cost/ price increases are small

The drawback of the large amount of papers in the empirical papers are they only focus on the short-time effect

Competitive market for low-wage labour:

Law of one price, i.e. single, market-clearing wage rate

Wage dispersion

• Different worker-types (LOP (Law of One Price) still holds for same type?)
• Or imperfect/ monopsonistic competition in the labour market

Why some of the biggest beneficiaries are in the middle of the income distribution?

Because the MW law might not well-targeted on the poorest households.