Minimum Wages and Hours of Work
Ross Doppelt ()
No 1578, 2017 Meeting Papers from Society for Economic Dynamics
I investigate, both empirically and theoretically, how minimum-wage laws affect the intensive margin of labor, or the number hours per employee. Using CPS data, I document the fact that minimum-wage employees work longer hours when the minimum wage is higher. To explain this pattern, I introduce a theoretical model of search and bargaining, subject to minimum-wage laws. Within a match, the number of hours is determined by an upward-sloping labor-supply curve, so people are willing to work more when the minimum wage goes up. Because contracts are bargained bilaterally, the firm's marginal profit from hiring an extra hour is positive, so firms are willing to accept the extra labor. However, higher wages diminish total profits, vacancy creation, and employment. I derive conditions under which a minimum wage can be welfare-improving, and I discuss empirical tests to determine whether those conditions are satisfied. In particular, if an increase in the minimum wage leads to an increase in total payrolls, then it suggests that a higher minimum wage is welfare-improving. After deriving these analytical results, I extend the model to facilitate a quantitative analysis.
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