This research was partially supported by the W. E. Upjohn Institute for Employment Research and the C. V. Starr Center for Applied Economics at NYU. I have received many useful comments from participants in seminars held at North Carolina, Georgetown, Johns Hopkins, Columbia, the New York Fed, NYU, LSE, Yale, Bocconi, the BLS, and Western Ontario, and in conferences, including the Econometric Society Meetings (New York, 1999), the Institute for Research on Poverty Summer Workshop (Madison, 1999), the Society for Economic Dynamics (Sardegna, 1999), the Goldwater Labor Markets Conference (2004), and the European Econometric Society Meetings (1999 and 2004). I am especially grateful to Joop Abbring, Jim Albrecht, Matt Dey, Luca Flabbi, Martin Gervais, Sarah Hamersma, Winfried Koeniger, Ricardo Lagos, James Mabli, Julien Pratt, Holger Sieg, a co-editor, and three anonymous referees for constructive comments and suggestions. I remain solely responsible for all errors, omissions, and interpretations.
Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates
Article first published online: 19 JUN 2006
Volume 74, Issue 4, pages 1013–1062, July 2006
How to Cite
Flinn, C. J. (2006), Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates. Econometrica, 74: 1013–1062. doi: 10.1111/j.1468-0262.2006.00693.x
- Issue published online: 19 JUN 2006
- Article first published online: 19 JUN 2006
- Manuscript received May, 2003; final revision received February, 2006.
- Minimum wages;
- matching models;
- Nash bargaining;
- matching function
Building upon a continuous-time model of search with Nash bargaining in a stationary environment, we analyze the effect of changes in minimum wages on labor market outcomes and welfare. Although minimum wage increases may or may not lead to increases in unemployment in our model, they can be welfare-improving to labor market participants on both the supply and demand sides of the labor market. We discuss identification of the model using Current Population Survey data on accepted wages and unemployment durations, and show that by incorporating a limited amount of information from the demand side of the market it is possible to obtain credible and precise estimates of all primitive parameters. We show that the optimal minimum wage in 1996 depends critically on whether or not contact rates can be considered to be exogenous and we note that the limited variation in minimum wages makes testing this assumption problematic.