The Behavioral Effects of Minimum Wages

Armin Falk, Ernst Fehr and Christian Zehnder

No 1625, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.

Keywords: monopsony; labor market; fairness; reservation wages; minimum wages; entitlement (search for similar items in EconPapers)
JEL-codes: C91 D63 E64 J38 J42 J58 J68 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2005-06
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-lab, nep-ltv and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published - published in: Quarterly Journal of Economics, 2006, 121 (4), 1347-1381

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Working Paper: The Behavioural Effects of Minimum Wages (2005)
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