The Asymmetric Effect of Wage Floors: A Natural Experiment with a Rising and Falling Minimum Wage

Emiliano Huet-Vaughn () and Jon Piqueras
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Emiliano Huet-Vaughn: Pomona College

No 16684, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Exploiting a unique natural experiment,we showthe asymmetric effects of a large increase and an equivalent subsequent decrease to a binding minimum wage. Wages in a leading low-wage industry increase as the minimumwage rises, but do not fall when it is lowered. This boost for low-wage workers' earnings is apparently permanent five years after the policy is revoked, providing novel evidence of hysteresis in wage setting from temporary labor policy. In the first year post repeal this is consistent with downward nominal wage rigidity. But, the elevated earnings persist even in high inflation times, contrary to the prediction from existing work that real wage reductions under high inflation should erode the nominal wage gap relative to unaffected firms. Our findings thus challenge the conventional view that inflation "greases the wheels" of the labor market in the face of downward nominal wage rigidity, and, demonstrate the value of even transitory labor market policy in achieving permanent gains for workers (play it while you got it).

Keywords: hysteresis; minimum wage; downward nominal wage rigidity (search for similar items in EconPapers)
JEL-codes: E24 E31 J3 J8 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2023-12
New Economics Papers: this item is included in nep-lma
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