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Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining

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  • Flinn, Christopher

    (New York University)

Abstract

Building upon a continuous-time model of search with Nash bargaining in a stationary environment, we analyze the effect of changes in minimum wages on labor market outcomes and welfare. While minimum wage increases invariably lead to employment losses in our model, they may be welfare-improving to labor market participants using any one of a number of welfare criteria. A key determinant of the welfare impact of a minimum wage increase is the Nash bargaining power parameter. We discuss identification of this model using Current Population Survey data on accepted wages and unemployment durations, and demonstrate that key parameters are not identified when the distribution of match values belongs to a location-scale family. By incorporating a limited amount of information from the demand side of the market, we are able to obtain credible and precise estimates of all primitive parameters, including bargaining power. Direct estimates of the welfare impact of the minimum wage increase from $4.25 to $4.75 in 1996 provide limited evidence of a small improvement. Using estimates of the primitive parameters we show that more substantial welfare gains for labor market participants could have been obtained by doubling the minimum wage rate in 1996, though at the cost of a perhaps unacceptably high unemployment rate.

Suggested Citation

  • Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp949
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    References listed on IDEAS

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    Cited by:

    1. Mark Gertler & Antonella Trigari, 2009. "Unemployment Fluctuations with Staggered Nash Wage Bargaining," Journal of Political Economy, University of Chicago Press, vol. 117(1), pages 38-86, February.
    2. Luca Flabbi, 2010. "Gender Discrimination Estimation In A Search Model With Matching And Bargaining," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 745-783, August.
    3. Natalya Shelkova, 2015. "Low-Wage Labor Markets and the Power of Suggestion," Review of Social Economy, Taylor & Francis Journals, vol. 73(1), pages 61-88, March.
    4. Christopher J. Flinn, 2002. "Interpreting Minimum Wage Effects on Wage Distributions : A Cautionary Tale," Annals of Economics and Statistics, GENES, issue 67-68, pages 309-355.
    5. Leora Friedberg & Anthony Webb, 2006. "Determinants and Consequences of Bargaining Power in Households," NBER Working Papers 12367, National Bureau of Economic Research, Inc.
    6. Flabbi, Luca, 2010. "Prejudice and gender differentials in the US labor market in the last twenty years," Journal of Econometrics, Elsevier, vol. 156(1), pages 190-200, May.
    7. Pierre Cahuc & Guy Laroque, 2014. "Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 259-273, April.
    8. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
    9. Mark Gertler & Luca Sala & Antonella Trigari, 2008. "An Estimated Monetary DSGE Model with Unemployment and Staggered Nominal Wage Bargaining," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(8), pages 1713-1764, December.
    10. Patrick Kline & Enrico Moretti, 2014. "People, Places, and Public Policy: Some Simple Welfare Economics of Local Economic Development Programs," Annual Review of Economics, Annual Reviews, vol. 6(1), pages 629-662, August.
    11. Flabbi, Luca & Moro, Andrea, 2012. "The effect of job flexibility on female labor market outcomes: Estimates from a search and bargaining model," Journal of Econometrics, Elsevier, vol. 168(1), pages 81-95.
    12. Richard A. Brecher & Till Gross, 2019. "A minimum‐wage model of unemployment and growth: The case of a backward‐bending demand curve for labor," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(3), pages 297-309, September.
    13. Natalya Y. Shelkova, 2008. "Low-wage labor markets amd the power of suggestion," Working Papers 1112, Princeton University, Department of Economics, Industrial Relations Section..
    14. Violante, Giovanni & Hornstein, Andreas, 2006. "Frictional Wage Dispersion in Search Models: A Quantitative Approach," CEPR Discussion Papers 5935, C.E.P.R. Discussion Papers.
    15. Daniel Aaronson & Eric French & James M. MacDonald, 2004. "The minimum wage and restaurant prices," Working Paper Series WP-04-21, Federal Reserve Bank of Chicago.
    16. Natalya Y. Shelkova, 2009. "The Minimum Wage Spike in the Search Economy with Wage-Posting," Working papers 2009-40, University of Connecticut, Department of Economics.
    17. Andreas Hornstein & Per Krusell & Giovanni L. Violante, 2011. "Frictional Wage Dispersion in Search Models: A Quantitative Assessment," American Economic Review, American Economic Association, vol. 101(7), pages 2873-2898, December.

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    More about this item

    Keywords

    minimum wages; matching models; Nash bargaining;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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