The behavioral effects of minimum wages

Arbeitspapier

The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 1625

Classification and Topics

• Classification: Wirtschaft ; Design of Experiments: Laboratory, Individual ; Equity, Justice, Inequality, and Other Normative Criteria and Measurement ; Incomes Policy; Price Policy ; Wages, Compensation, and Labor Costs: Public Policy ; Monopsony; Segmented Labor Markets ; Labor-Management Relations, Trade Unions, and Collective Bargaining: Public Policy ; Mobility, Unemployment, and Vacancies: Public Policy
• Subject: minimum wages ; labor market ; monopsony ; fairness ; reservation wages ; entitlement ; Mindestlohn ; Arbeitsangebot ; Lohnniveau

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Falk, Armin ; Fehr, Ernst ; Zehnder, Christian
• Event: Veröffentlichung
• (who): Institute for the Study of Labor (IZA)
• (where): Bonn
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/33656
• Last update: 10.03.2025, 11:45 AM CET