Person-Specific Labor Costs and the Employment Effects of Minimum Wage Policy

Economic debates over minimum wage policy are typically premised on the assumption that raising a binding wage floor must reduce long-run employment if the affected markets are competitive and complete. It is shown here to the contrary that employment effects of raising the minimum are indeterminate if competitive employers incur person-specific labor costs, which vary with the number of employees rather than with hours worked per employee, and there are diminishing returns in the contribution of individual hours to effective labor input. This conclusion is robust to extensions of the basic model incorporating various forms of input substitutability. In addition, the qualitative impact of varying non-labor inputs is shown to depend critically on how they interact with labor in the production function. (JEL D21,J23, J32, J38)