Minimum Wage Effects and Low-Wage Labor Markets: A Disequilibrium Approach

David Neumark, William Wascher

NBER Working Paper No. 4617
Issued in January 1994
NBER Program(s):Labor Studies

We present a new approach to estimating minimum wage effects on employment. In contrast to most previous research, we account for the possibility that the relationship between minimum wages and employment depends on the magnitude of the minimum wage relative to the equilibrium wage in the absence of the legislated minimum. In particular, estimating the employment effects of binding minimum wages requires separation of sample observations into those that are on the labor demand curve but off the labor supply curve, and those that are at labor market equilibria. The paper implements an endogenous switching regression model with unknown sample separation that yields these estimates. The approach also yields estimates of the impact of labor market characteristics on the probability that minimum wages are binding. We also extend the disequilibrium approach to monopsony, which introduces a third regime, between the equilibrium monopsony wage and the equilibrium competitive wage, in which observations are on the labor supply curve but off the labor demand curve and minimum wages are therefore positively related to employment. Minimum wage effects under monopsony are estimated in a three-regime endogenous switching regression model with unknown regimes, and the monopsony characterization of low-wage labor markets is tested against the competitive characterization.

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Document Object Identifier (DOI): 10.3386/w4617


  • Published as "Minimum Wage Effects on Employment and School Enrollment", Journal of Business & Economic Statistics, Vol. 13, no. 2 (1995): 199-206.
  • Published as "Is the Time-Series Evidence on Minimum Wage Effects Contaminated by Publication Bias?", Economic Inquiry, Vol. 36, no. 3 (July 1998): 458-470.

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