What is the optimal minimum wage?

Yujiang River Chen and Coen Teulings

No 17026, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The extensive literature on minimum wages has found evidence for the compression of relative wages and mixed results for employment. This literature has been plagued by a number of problems. First, the median-minimum wage ratio is used as the independent variable, where the median is endogenous. Second, it is difficult to disentangle compression of relative wages and truncation due to employment effects. Third, all effects are likely to depend on the initial level of the minimum. Fourth, employment effects are likely to differ between worker types. We offer solutions for these problems, by using instruments for the median, by using data on personal characteristics, and by using a flexible specification. We apply our method to US data starting from 1979, allowing for a wide variation in minimum wages. We find strong compression and positive employment effects for the lower half of the distribution, persisting for quite high levels of the minimum.

Keywords: Minimum wages; Us; Employment effects; Wage dispersion; Wage share (search for similar items in EconPapers)
JEL-codes: J31 J58 R12 (search for similar items in EconPapers)
Date: 2022-02
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