Some deadweight losses from the minimum wage: the cases of full and partial compliance |
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| Authors: | Filip Palda |
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| Institution: | 1. Department of Economics and Finance, Utah State University, 3565 Old Main Hill, Logan, UT 84322, United States;2. American Enterprise Institute, 1150 17th St, NW, Washington D.C., 20036, United States;3. Columbia Business School, Columbia University, 3022 Broadway, Uris Hall 101 New York, NY 10027 and the National Bureau of Economic Research, United States;1. School of Applied Mathematics, Nanjing University of Finance and Economics, Nanjing, Jiangsu 210023, China;2. School of Science, Nanjing University of Science and Technology, Nanjing, Jiangsu 210094, China;3. School of Computer Engineering, Jinling Institute of Technology, Nanjing, Jiangsu 211169, China |
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| Abstract: | This paper highlights the social costs from non-price rationing of the labour force due to the minimum wage. By short-circuiting the ability of low reservation-wage workers to underbid high-reservation wage workers, the minimum wage interferes with the market's basic function of grouping the lowest cost workers with the highest productivity firms. The present paper models the deadweight loss that society bears when high reservation-cost workers displace low reservation-cost workers. When firms can evade part or all of the minimum wage, an extra deadweight loss arises. Firms with high evasive ability but low productivity may displace firms with low evasive ability but high productivity. |
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| Keywords: | Minimum wage Informal sector Deadweight loss |
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