Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/33656
Authors: 
Falk, Armin
Fehr, Ernst
Zehnder, Christian
Year of Publication: 
2005
Series/Report no.: 
IZA Discussion Papers 1625
Abstract: 
The prevailing labor market models assume that minimum wages do not affect the labor supply schedule. We challenge this view in this paper by showing experimentally that minimum wages have significant and lasting effects on subjects' reservation wages. The temporary introduction of a minimum wage leads to a rise in subjects' reservation wages which persists even after the minimum wage has been removed. Firms are therefore forced to pay higher wages after the removal of the minimum wage than before its introduction. As a consequence, the employment effects of removing the minimum wage are significantly smaller than are the effects of its introduction. The impact of minimum wages on reservation wages may also explain the anomalously low utilization of subminimum wages if employers are given the opportunity of paying less than a minimum wage previously introduced. It may further explain why employers often increase workers' wages after an increase in the minimum wage by an amount exceeding that necessary for compliance with the higher minimum. At a more general level, our results suggest that economic policy may affect people's behavior by shaping the perception of what is a fair transaction and by creating entitlement effects.
Subjects: 
minimum wages
labor market
monopsony
fairness
reservation wages
entitlement
JEL: 
C91
D63
E64
J38
J42
J58
J68
Document Type: 
Working Paper

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