Does the Minimum Wage Cause Inefficient Rationing?
This paper investigates whether the minimum wage leads to inefficient job rationing. By not allowing wages to clear the labor market, the minimum wage could cause workers with low reservation wages to be rationed out while equally skilled workers with higher reservation wages are employed. This paper exploits the overlapping nature of the CPS panels to more precisely identify those most affected by the minimum wage, a group I refer to as the "unskilled." I test for inefficient rationing by examining whether the reservation wages of employed unskilled workers in states where the 1990-1991 federal minimum wage increase had the largest impact rose relative to reservation wages of unskilled workers in other states. I find that reservation wages of unskilled workers in high-impact states did not rise relative to reservation wages in other states, indicating that the increase in the minimum wage did not cause jobs to be allocated less efficiently.
I would like to thank David Cutler, Thomas DeLeire, Martin Feldstein, Edward Glaeser, Caroline Hoxby, Lawrence Katz, Ellen Meara and seminar participants at Harvard and Chicago for suggestions and helpful discussions. I would like to thank Andra Hibbert for excellent research assistance. Financial support from the Olin Foundation and the National Institute on Aging through Grant Number T32-AG00186 is gratefully acknowledged. All errors are my own. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Luttmer Erzo F.P., 2007. "Does the Minimum Wage Cause Inefficient Rationing?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-42, October. citation courtesy of