Job and Wage Mobility in a Search Model with Non-Compliance (Exemptions) with the Minimum Wage

Zvi Eckstein (), Suqin Ge () and Barbara Petrongolo ()
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Barbara Petrongolo: London School of Economics and IZA Bonn

No 2076, IZA Discussion Papers from Institute for the Study of Labor (IZA)

Abstract: How well does a simple search on-the-job model fit the eighteen years of job and wage mobility of high school graduates? To answer this question we are confronted from the data with a prevalent non-compliance and exemptions from the minimum wage. We incorporate this observation in a job search model with three main ingredients: (i) search on-the-job; (ii) minimum wages, with potentially imperfect compliance or exemptions; and, (iii) exogenous wage growth on-the-job. We use panel data drawn from the NLSY79, US youth panel starting in 1979, to estimate the parameters of our simple job search model and, in particular, the extent of non-compliance/exemptions to the minimum wage. The model is solved numerically and we use simulated moments to estimate the parameters. The estimated parameters are consistent with the model and they provide a good fit for the observed levels and trends of the main job and wage mobility data. Furthermore, the estimated model indicates that the non-compliance and exemption rate with the federal minimum wage translates into a roughly 10% of jobs paying less than the minimum wage. Counterfactual experiment of increase of the compliance/non-exemption rate or the minimum wage shows a small effect on mean accepted wages but a significant negative effect on the non-employment rate.

Keywords: minimum wages; compliance; exemptions; job search; wage growth (search for similar items in EconPapers)
JEL-codes: J42 J63 J64 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-lab
Date: Written
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