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Title: The Minimum Wage and Its Impact on Wage and Employment
Citation Type: Conference Paper
Publication Year: 2018
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Abstract: We propose a neoclassical labour market model and estimating it empirically. We consider the wage equation and employment equation at the same time. The wage determination equation contains an observable human capital level and an unobservable random term which is normally distributed. For workers who earn more than the minimum wage, the wage function allows different geographic regions to have different average wage levels, as well as different returns to human capital. Regional observable characteristics can capture these differences. We use the observed bindingness of minimum wages, which describe the effectiveness of minimum wage, to model spillovers for workers with different human capital levels explicitly. The impact fades out exponentially. Secondly, we associate the wage determination function to an employment function, which contains an observable and unobservable part like the wage equation, but also an extra labour elasticity component. We also add a disemployment effect — the change of employment due to the introduction of minimum wages — into the function, to explicitly estimate employment effects. To estimate a non-linear censored model with correlated error terms, we propose a five-step procedure and use maximum likelihood estimation. We implement the method with the Current Population Survey data from the United States. We correct the potential bias in estimating effective minimum wages using occupation information and spatial correlation. 80 percent of the variation in the effectiveness of minimum wages can be estimated by the real minimum wage and those regional occupational characteristics. After correcting the bias using occupation information and city size, we find that the effective minimum wage correlates significantly with the proportion of workers earning at or below the minimum wage. The full model shows that the spillover effect of minimum wages is high and persistent. We find that the introduction of and increases in minimum wages have significant disemployment effects, which offset the potential income gain of increases in minimum wages.
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Authors: Chen, Yujiang; Teulings, Coen
Conference Name: Cesifo-Delphi Conferences
Publisher Location: Hydra Island, Greece
Data Collections: IPUMS CPS
Topics: Labor Force and Occupational Structure
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