Seminarium: Arin Dube, Univ of Massachusetts Amherst

Abstract:

At what point do higher wage floors begin to reduce employment? Imperfect competition on the labor market suggests the presence of a turning point: employment may rise or remain unchanged at low levels of the wage floor but declines once it becomes sufficiently high. We investigate the empirical relevance of this prediction using a comprehensive sample of 60 U.S. state-level minimum wage increases between 1980 and 2019. Exploiting variation across seven measures of minimum wage bite---including the Kaitz index, real minimum wage levels, and the workforce share below the new minimum---we test for heterogeneous employment effects consistent with a turning point. Across specifications, we find no evidence that existing policy changes have reached such a threshold. Even among the most binding increases, where the minimum wage ranges from 55 to 60 percent of the median wage, estimated employment effects remain positive, with an elasticity of $0.32$ (s.e. $0.15$). To interpret these findings, we calibrate a model of monopsonistic competition in labor markets and use it to quantify the location of the turning point. The model implies a threshold Kaitz index of approximately 0.62-0.72, suggesting that historical U.S. minimum wage policies have operated below the range where negative employment effects are predicted to emerge.