The Impact of the Minimum Wage If Workers Can Adjust Effort

Richard A Ippolito

Journal of Law and Economics, 2003, vol. 46, issue 1, 207-27

Abstract: In traditional models, a binding minimum wage creates a excess supply of low-skilled workers for minimum-wage jobs. Employment falls, and some jobs are reallocated from high- to low-rent workers. This disequilibrium cannot persist. Competition to secure the property rights to now-scarce jobs undoes most of the effects of the minimum wage. Workers who attach the highest value to the jobs are willing to work harder to keep them; marginal workers are squeezed out of the market as high-rent workers ratchet up effort level. This process erodes the rent conferred by the minimum wage but also increases the value of marginal product, which reduces the size of the employment effect. The minimum wage confers more money income on low-skilled workers and creates some distortion in the optimum combination of wage rate and effort level. Under plausible conditions, the minimum wage has little effect on rent, employment, output, and profits.

Date: 2003
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Citations: View citations in EconPapers (11)

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