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An (updated) draft of my job market paper is now available as a @McMasterEcon working paper. The paper has theoretical and empirical parts and studies the desirability of the minimum wage in a setting where policy makers have access to other instruments, notably income taxes 1/n
This question seems to be getting attention from policy makers so allow me to briefly explain what I do in the paper. First, I derive a formula for the marginal welfare gain from introducing a minimum wage in a setting with hetereogeneous individuals and search frictions 2/n
Individuals are heterogeneous along two dimensions: earnings capacity/ability and fixed search costs/value of being out of the labour market. The presence of search frictions is also important because it is often looked to as one of the reasons why minimum wages may be warranted
The main theoretical result is that the minimum wage *can* improve both labor market efficiency and relax the equity-efficiency trade-off created by income taxes. I show that the 2 roles for the minimum wage are related to its effects on *both* LF participation and employment 4/n
The labor market efficiency role of the minimum wage is proportional to the (macro) LF participation elasticity. The intuition is based on a "revealed preference" argument. If LF participation depends on the desirability of being in the labor market, then any policy... 5/n
... including the minimum wage that increases the desirability of being in the labor market is welfare improving. I show that this is the case even when income taxes are set optimally. The participation response to the minimum wage has been severely understudied. 6/n
The redistributive (equity-efficiency trade-off) role of the minimum wage, on the other hand, depends on both the difference between the employment and LF participation elasticities. Intuition: the forces shaping redistribution in the tax system push/distort the tightness... 7/n
... (ratio of vacancies to job seekers) in the low-skilled labor market above or below its efficient value - this is the equity/efficiency trade-off! Since the minimum wage lowers the tightness, it can be welfare improving if labor income taxes distorted the tightness upwards 8/n
The difference b/t the employment and LF participation elasticities captures the amount by which the MW lowers the tightness. Therefore, if lowering the tightness is desirable, a larger gap b/t the employment and LF participation elasticities is good! 9/n
Now onto the empirics! I estimate the causal effect of the minimum wage on LF participation using U.S. federal and state variation from 1974-2014. I provide new evidence of the impact of the minimum wage on LF participation for groups of less educated U.S. adults 10/n
My estimates suggest that, on average, minimum wage increases during this period reduced LF participation for young adults (age 20-29) with less than a high school diploma. My estimates come with all of the usual caveats in the minimum wage literature... 11/n
...but suggest that a 10% increase in the minimum wage lowers LF participation by about 2-2.5%. Estimates are more negative for young women than man but seem to be less negative during the latter part of the sample (i.e. 1997-2014).
I use my estimates to calibrate my "marginal welfare gain" formula. The results suggest that minimum wage increases during this period likely had small impacts on welfare and that the interactions between the minimum wage and taxes are important to consider. Fin. 13/13
