Exploring the Impacts of Minimum Wage Changes

April 5, 2007

The impact of minimum wage changes upon the labor market is the focus of a new Working Paper, authored by Erzo F.P. Luttmer, associate professor of public policy.

The Paper, titled "Does the Minimum Wage Cause Inefficient Rationing?" explores the possibility that higher minimum wages reduce the efficiency of the allocation of jobs.

In this paper, Luttmer asks whether the minimum wage affects who is working. When the minimum wage increases, minimum wage jobs become more attractive. Thus, some people who weren’t interested in these jobs before the minimum wage increase will now apply for them. So Luttmer questions whether the minimum wage increase leads to inefficient job rationing by pushing out people who rely on minimum wage jobs for a living, and replacing them with people who care relatively little about working (e.g., teenagers looking for extra spending money)?

The 1990/91 federal minimum wage hike had a larger impact in states where the state minimum wage was low. Luttmer compares changes in the composition of low-wage workers in states where the federal minimum wage had a large impact to changes in the composition of low-wage workers in other states, and finds no evidence of the minimum wage leading to inefficient rationing. “Fortunately, the empirical results alleviate the fear that the minimum wage disproportionally harms those who most need the minimum-wage jobs,” Luttmer says.

Luttmer teaches public economics and microeconomics. His research interests include public economics, labor economics, and applied econometrics.

Access the Working Paper, "Does the Minimum Wage Cause Inefficient Rationing?" on the Kennedy School Working Papers website. The active URL for the Working Paper is: http://www.ksg.harvard.edu/ksgnews/Features/news/032907_luttmer_minimum_wage.htm

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