The Consequences of MinimumWage Laws: Some Theoretical Ideas Revisited

We develop an efficiency wages model, to study the effects of the imposition of a higher minimum wage on employment of heterogeneous workers, when employers use the wage and monitoring intensity to induce motivation. It is shown that when effort is adjusted to exogenous shocks then the wage and supervision, and employment and supervision can be either strategic complements or strategic substitutes. This Þnding provides a theoretical explanation of why the results of studies that try to identify the wage-supervision trade-off(Neal 1993, Kruse 1992, Leonard 1987), and do not control for effort may be hindered by omitted variable bias and thus are misleading. The total effect of a higher minimum wage on employment can be decomposed into two distinct effects; the ‘partial’ wage effect and the ‘supervision’ effect. We show that, when the wage and supervision are complements in providing incentives then employment and supervision are strategic complements, the supervision and the wage effect are counteractive and the total employment effect of a higher minimum wage is ambiguous. On the other hand if there is a trade-off between ∗I would like to thank my supervisors Mr. Paul Gregg and Dr. Hedley Rees and my advisor Professor Simon Burgess for support as well as valuable feedback. Participants in the fourth IZA European Summer School in Labour Economics on “The Economics of Low-Income and Low-Pay” and participants in the National Minimum Wage Conference, organized by CEP, LSE are thankfully acknowledged for helpful suggestions. Finally, I am grateful to Dr. Thibeau Verge, Professor Alan Manning and Professor Juan Jose Dolado for comments that signiÞcantly improve the material of the paper.