Determining the equilibrium effects of minimum wage changes on labor market outcomes is achallenging modeling and estimation problem; arriving at policy recommendations is a task even more daunting. Faced with the inherent difficulties of modeling equilibrium labor market events given the limited amount of data to which researchers have access, much recent research has been performed outside of an explicit behavioral framework, with researchers pursuing the more limited objective of carefully describing the observed effects of recent minimum wage changes using quasi-experimental methods [see Card and Krueger (1995) fora summary of these studies anda comprehensive, critical survey of most of the previous research done in this area].
In our view, these recent studies have been particularly useful in indicating that the "textbook" competitive model of the labor market, which has been used as an interpretive framework for the bulk of empirical work performed using aggregated time series data, may have serious deficiencies in accounting for minimum wage effects on labor market outcomes when confronted with disaggregated information.
While the quasi-experimental results have raised a number of interesting challenges to orthodox theory, few cogent models have been advanced that are consistent with the results that have been found. Some of the explanations for these empirical findings (e.g., lack of significant employment losses, impacts on the wage distribution above the minimum) do not seem to be testable given our current data resources. In fact, it appears difficult tooperationalize many of the explanations proposed even for the more modest purpose of empirical implementation.
It has long been recognized that for the imposition of minimum wages to have beneficial effects on the welfare distribution of workers and searchers, firms must have so medegreeofmonop sony power [see for example Manning (1995)]. Search frictions and the existence of match-specificcapital are capable of providing this. The existence of both seems in accord with commonsense and empirical findings[on the existence of match-specific capital see Miller (1984) and Flinn (1986), for example]. Below we formulate a model which includes match-specific capital, job search, and worker-firm bargaining over match specific rents, that is capable of accounting for many of the empirical observations cited by CK in their survey of minimum wage research based on individual level data (1995, Ch. 7).
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Minimum Wage Effectson Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates
