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The Behavioral Effects of Minimum Wages


Falk, Armin; Fehr, Ernst; Zehnder, Christian (2005). The Behavioral Effects of Minimum Wages. Working paper series / Institute for Empirical Research in Economics No. 247, University of Zurich.

Abstract

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 furthernexplain why employers often increase workers' wages after an increase in the minimum wagenby an amount exceeding that necessary for compliance with the higher minimum. At a morengeneral 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.

Abstract

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 furthernexplain why employers often increase workers' wages after an increase in the minimum wagenby an amount exceeding that necessary for compliance with the higher minimum. At a morengeneral 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.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Institute for Empirical Research in Economics (former)
Dewey Decimal Classification:330 Economics
Language:English
Date:June 2005
Deposited On:29 Nov 2011 22:32
Last Modified:12 Aug 2017 12:57
Series Name:Working paper series / Institute for Empirical Research in Economics
ISSN:1424-0459
Official URL:http://www.econ.uzh.ch/wp.html

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