Posted by: Tobias | October 27, 2008

Law of Unintended Consequences: Adverse Wage Effects of the Minimum Wage

There are several small rain forests worth of literature on the minimum wage; its effects on wages, employment, educational attainment, income distribution and a gazillion other things. So far, however, few people have looked at the effects that the minimum wage has on people other than those earning it. This new study on exactly that question sounds very intriguing:

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.

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