Minimum wages and youth unemployment

This paper constructs a labor search model to explore the effects of minimum wages on youth unemployment. To capture the gradual decline in unemployment for young workers as they age, the standard search model is extended so that workers gain experience when employed. Experienced workers have higher average productivity and lower job finding and separation rates that match wage and worker flow data. In this environment, minimum wages can have large effects on unemployment because they interact with a worker's ability to gain job experience. The increase in minimum wages between 2007 and 2009 can account for a 0.8 percentage point increase in the steady state unemployment rate and a 2.8 percentage point increase in unemployment for 15–24 year old workers in the model parameterized to simulate outcomes of high school educated workers. Minimum wages can also help explain the high rates of youth unemployment in France compared to the United States.     

Minimum wages in an automating economy

We explore the suitability of the minimum wage as a policy instrument for reducing emerging income inequality created by new technologies. For this, we implement a binding minimum wage in a task-based framework, in which tasks are conducted by machines, low-skill, and high-skill workers. In this framework, an increasing minimum wage reduces the inequality between the low-skill wage and the other factor prices, whereas the share of income of low-skill workers in the national income is nonincreasing. Then, we analyze the impact of an automating economy along the extensive and intensive margins. In a setting with a minimum wage, it can be shown that automation at the extensive margin and the creation of new, labor-intensive tasks do not increase the aggregate output in general, as the displacement of low-skill workers counteracts the positive effects of cost-savings. Finally, we highlight a potential trade-off between less inequality of the factor prices and greater inequality of the income distribution when a minimum wage is introduced into an automating economy.     

Minimum wages and the wage distribution in Estonia

Abstract: This article studies how changes in the statutory minimum wage have affected the wage distribution in Estonia, a post-transition country with little collective bargaining and relatively large wage inequality. The analyses show that the minimum wage has had substantial spillover effects on wages in the lower tail of the distribution; the effects are most pronounced up to the twentieth percentile and then decline markedly. The minimum wage has contributed to lower wage inequality and this has particularly benefitted low-wage segments of the labour market such as women and the elderly. Interestingly, the importance of the minimum wage for the wage distribution was smaller during the global financial crisis than before or after the crisis.     

Minimum wages and the gender wage gap

Estimates are made of the effect of minimum wages on the size and composition of the gender wage gap in Canada in 1986. It is found that minimum wages close the wage gap substantially for young workers and less so for adults. The reduction in the gap is most attributable to the adverse employment effects of minimum wages. The results also indicate that most of the reduction in the gap is realized through a fall in the discriminatory component.     

Imperfect credibility,sticky wages,and welfare

This paper studies optimal monetary policy under imperfect credibility in a New Keynesian model with staggered price and wage setting. In our imperfect credibility framework, the central bank commits to a policy plan but occasionally reneges on past promises with a given common knowledge probability. We find that the welfare gains from increasing credibility are approximately linear on the initial credibility level. We also find that the output-inflation stabilisation trade-off is nonmonotonic as higher credibility does not always reduce output volatility. The variance decomposition shows that wage markup shocks are the main driver of economic fluctuations and that these shocks are better contained, even in relative terms, when credibility is high. We then show that the degree of credibility impacts the effect of wage flexibility on welfare. When credibility is low, monetary policy is less potent and the economy can experience a feedback loop between wage volatility and price volatility. We show, though, that once wage markup shocks are taken into account, wage flexibility is usually welfare improving.     

Fertility,income and welfare in an OLG model with regulated wages

We analyse the effects of the regulation of wages in a standard one-sector OLG model of neoclassical growth extended to account for endogenous fertility decisions of households and unemployment benefit policies financed at balanced budget. In contrast with the prevailing literature, which has failed to pay due attention to inter-temporal contexts, our conclusion is that minimum wages may be introduced not only for equity reasons, that is, to increase the income of low-paid workers, but under suitable conditions—i.e., if production is sufficiently capital oriented and the unemployment benefits are high enough—minimum wage legislation might be considered as a source of increased economic performance despite unemployment, i.e. a regulated-wage economy performs better than a market-wage economy. As a consequence, since higher minimum wages raise per capita income together with increasing unemployment, our results imply that a positive correlation between unemployment and long-run income per-capita may exist. Further, the lifetime welfare of the representative generation may be increased as well. Finally, the wage rate may also be treated as a policy instrument for the control of population growth.

Minimum wage spillover effects and social welfare in a model of stochastic job matching

In this paper, I carry out a welfare analysis of the minimum wage in the framework of a Diamond–Mortensen–Pissarides model with stochastic job matching. I explore the role of the minimum wage in a labor market with trading externalities and present the necessary and sufficient condition for a minimum wage hike to be efficiency enhancing. In this context, I characterize minimum wage spillover effects and demonstrate that there is a direct link between the welfare effects and spillover effects of a minimum wage. This theoretical finding suggests that the welfare impact of minimum wage changes can be inferred from the empirical observation of spillover effects on the wage distribution.     

Hotelling and recycling

We study the exploitation of recyclable exhaustible resources such as metals that are crucial for the energy transition or phosphorus that is crucial for agricultural production. We use a standard Hotelling model of resource exploitation that includes a primary sector and a recycling sector. We study two polar cases: competitive and monopolistic extraction. We show that, when the primary sector is competitive, the Hotelling’s rule holds and the price of the recyclable resource increases over time. We then show a new reason why the price of an exhaustible resource may decrease: when the primary sector is monopolistic, the primary producer has incentives to delay its production activities in order to delay recycling. As a consequence, the price path of the recyclable resource may be U-shaped. Numerical simulations reveal that the monopolist has an incentive to delay extraction when the recoverability rate is high (because more recycled goods are produced) or when the recoverability rate is low (when fewer recycled goods are expected to be produced in the future). As a consequence, the date of exhaustion of the virgin resource is further away in time for high and low levels of recoverability than for intermediate levels.     

Costly location in Hotelling duopoly

We introduce a cost of location into Hotelling׳s (1929) [9] spatial duopoly model. We derive the general conditions on the cost-of-location function under which a pure strategy price-location Nash equilibrium exists. With linear transportation cost and a suitably specified cost of location that rises toward the center of the Hotelling line, symmetric equilibrium locations are in the outer quartiles of the line, ensuring the existence of pure strategy equilibrium prices. With quadratic transportation cost and a suitably specified cost of location that falls toward the center of the line, symmetric equilibrium locations range from the center to the end of the line.     

Risk compensation in wages – a replication

We use data from Germany, The Netherlands, Portugal and Spain to test for the effect of earnings variation on individual earnings. We replicate estimates for the USA and find that the variance of earnings in an occupation affects individual wages positively while the skewness of earnings has a negative effect. Both results are in conformity with wage compensation for risk averse workers. First version received: March 2001/Final version received: July 2002 We are grateful to two anonymous referees for valuable comments.     

Market wages,reservation wages,and retirement decisions

The paper is an empirical cross-section study of the retirement decisions of American white men between the ages of 58 and 67, predicated on the theoretical notion that an individual retires when his reservation wage exceeds his market wage. Reservation wages are derived from an explicit utility function in which the most critical taste parameter is assumed to vary both systematically and randomly across individuals. Market wages are derived from a standard wage equation adjusted to the special circumstances of older workers. The two equations are estimated jointly by maximum likelihood, which takes into account the potential selectivity bias inherent in the model (low-wage individuals tend to retire and cease reporting their market wage). The model is reasonably successful in predicting retirement decisions, and casts serious doubt on previous claims that the social security system induces many workers to retire earlier than they otherwise would. The normal effects of aging (on both market and reservation wages) and the incentives set up by private pension plans are estimated to be major causes of retirement.     

Sticky wages,efficiency wages,and market processes

Work on this article was supported by a grant from the Research Committee of the College of Business Administration, University of South Florida.     

Cartels in the unidirectional Hotelling model

We study the impact of space on perfect collusion sustainability within the unidirectional Hotelling model where the firms are constrained to move to the left. We obtain that when the firm that located to the left of the Hotelling segment has the greater incentive to deviate, the distance between the firms has a negative impact on the capability of the firms to sustain the collusion in equilibrium. On the other hand, when the firm that located to the right has the greater incentive to deviate, greater spatial distance makes the collusion easier to sustain in equilibrium. These results substantially differ from the bidirectional Hotelling model.     

Wage inequality and overeducation in a model with efficiency wages

Abstract.  This paper shows that the existence and persistence of 'overeducation' can be explained by an extension of the efficiency wage model. When calibrated to fit the amounts of overeducation found in most empirical studies, the model implies that both the relative wage and the relative employment of high‐skill workers depend inversely on aggregate economic activity. Keeping aggregate employment constant, furthermore, low‐skill unemployment rises, following an increase in the relative supply of high‐skill labour, and relative wages may be insensitive to changes in relative labour supplies. The model may help to explain rising wage inequality in some countries since the early 1970s. JEL classification: J31     

Agglomeration and fair wages

Abstract.  This paper implements a fair wage constraint into an analytically tractable core-periphery agglomeration model. This enables us to study the role of imperfect labour markets for the pattern of agglomeration. In the short run, a marginal increase in fair wage preferences leads to an unambiguous compression of the national factor price differential between skilled and unskilled labour, involving an increase in the unemployment rate of unskilled workers. In the long run, this mechanism renders full dispersion of an unstable equilibrium already at higher trade costs than in perfect labour markets. There is a tendency for fair wage preferences to enforce agglomeration.     

Privatization and efficiency wages

The impact of privatization is investigated in a shirking model of efficiency wages. Without trade unions, privatization — modeled as a stricter control of employees — lowers wages and raises employment, output, and profits, while effort and productivity effects depend on the employees' risk aversion. However, for a utilitarian monopoly union, facing a company characterized by a constant-elasticity labor-demand schedule, privatization raises efficiency wages. If privatization is modeled as a stronger profit orientation, wages, effort, and labor productivity will rise, while employment will shrink in a wage-setting firm. Again, wage and employment effects can be reversed in the case of wage negotiations.     

Market interconnection and wages

We show that wage behavior as well as the skilled–unskilled wage gap depend on elasticity of import demand. Although, our analysis is in the spirit of the Stolper–Samuelson theorem, factor intensity plays no role in our results.     

Bargaining regimes and wages in Portugal

In this paper we analyse the bargaining regime wage-effect in Portugal. The results indicate that the bargaining regime coverage is important in explaining the variability of wages. Wage differentials between bargaining regimes are substantial, a fact which may be related to a decentralised wage setting which prevails in Portugal. The highest wages are generated by multi-firm negotiations and the lowest are generated by sectoral contracts. Single-firm contracts align at an intermediate level in the ranking.Received: April 2001, Accepted: May 2002, JEL Classification: J31Correspondence to: Pedro T. PereiraWe are very grateful to an anonymous referee. Financial support from program PRAXIS XXI under grant PRAXIS/2/2.1/CSH/781/95 and FEDER is acknowledged. The third author also acknowledges financial support from program PRAXIS XXI under grant BD/3486/94 and from the University of the Azores.     

Some Taxation Theorems in the Hotelling Model

In this paper, we investigate the relationship between the demand ad valorem, cost ad valorem and unit taxes in terms of price, quantity and tax revenue. In particular, we prove that the Musgravian transformation holds in the Hotelling model. In addition, we show that the Suits‐Musgrave theorem must be revised as output in the Hotelling model remains invariant in the presence of different taxes. That is, for a given price instead of a given output, the tax revenue under demand ad valorem tax exceeds that under the corresponding unit tax as long as profit levels for both stores are positive, a very general assumption. The exception is when the two stores are located close to each other and transportation cost is zero. Only in this case, are tax revenues and price under both tax regimes the same. If both stores are symmetrically located, the superiority of the ad valorem tax holds true except when the two stores are located back to back. Finally the farther away the location of a firm from the end point is, the smaller the difference in tax revenues between demand ad valorem and unit tax will be: the effect of the Suits‐Musgrave theorem weakens in the presence of location clustering.