Are There Long-Run Effects of the Minimum Wage?

Area of Science:

• Economics
• Labor Economics
• Econometrics

Background:

• Empirical consensus indicates minimal employment effects from minimum wage increases.
• These observed effects are often interpreted as short-run elasticities.
• The policy relevance of long-run elasticities, potentially distinct from short-run ones, is often overlooked.

Purpose of the Study:

• To argue that observed small employment effects represent short-run elasticities.
• To develop a dynamic industry equilibrium model of labor demand.
• To reconcile small estimated short-run employment effects with product price pass-through.

Main Methods:

• Development of a dynamic industry equilibrium model of labor demand.
• Analysis of potential misinterpretations in long-run regression analyses.
• Modeling the relationship between minimum wage pass-through and product prices.

Main Results:

• Standard regression methods may fail to detect differences between short- and long-run elasticities using US data.
• The model reconciles small estimated short-run employment effects with observed price pass-through.
• Long-run elasticities are shown to be policy relevant and potentially differ from short-run elasticities.

Conclusions:

• Observed small employment effects of minimum wage increases are likely short-run phenomena.
• A dynamic model clarifies the interpretation of empirical findings and the pass-through to prices.
• Policy implications regarding minimum wage effects require consideration of long-run elasticities.