Wage Elasticity Research Articles

Minimum Wages and the Distribution of Family Incomes

There is robust evidence that higher minimum wages increase family incomes at the bottom of the distribution. The long-run (3 or more years) minimum wage elasticity of the non-elderly poverty rate with respect to the minimum wage ranges between −0.220 and −0.459 across alternative specifications. The long-run minimum wage elasticities for the tenth and fifteenth unconditional quantiles of family income range between 0.152 and 0.430 depending on specification. A reduction in public assistance partly offsets these income gains, which are on average 66 percent as large when using an expanded income definition including tax credits and noncash transfers. (JEL D31, I32, I38, J31, J38)

Downward real wage rigidity and equal treatment wage contracts: Theory and evidence

Recent dynamic contracting models of downward real wage rigidity with “equal treatment” — newly hired workers cannot price themselves into jobs by undercutting incumbents — imply that real wages are relatively rigid in “bad” times but upwardly flexible during “good” times. We use an administrative panel dataset to establish that such asymmetries are a feature of West German labor markets. We find that the elasticity of real wages with respect to output is very close to zero in downswings but positive and highly significant in upswings. In a separate analysis we find that after controlling for match fixed effects, the cyclicality of new hire wages is approximately the same as that for incumbent wages, regardless of whether or not they joined the establishment from unemployment. This is supportive of equal treatment. We also show that a four parameter version of the equal treatment contracting model of Snell and Thomas (2010) can replicate reasonably well the salient time series properties and co-properties of real wages, output, and unemployment, in particular the asymmetric response of wages to output that we find in the data.

Collective Labor Supply, Taxes, and Intrahousehold Allocation: An Empirical Approach

ABSTRACTMost empirical studies of the impact of labor income taxation on the labor supply behavior of households use a unitary modeling approach. In this article, we empirically analyze income taxation and the choice of working hours by combining the collective approach for household behavior and the discrete hours choice framework with fixed costs of work. We identify the sharing rule parameters with data on working hours of both the husband and the wife within a couple. Parameter estimates are used to evaluate various model outcomes, like the wage elasticities of labor supply and the impacts of wage changes on the intrahousehold allocation of income. We also simulate the consequences of a policy change in the tax system. We find that the collective model has different empirical outcomes of income sharing than a restricted model that imposes income pooling. In particular, a specification with income pooling fails to capture asymmetries in the income sharing across spouses. These differences in outcomes have consequences for the evaluation of policy changes in the tax system and shed light on the effectiveness of certain policies.

Labour Demand in the Post‐apartheid South African Wine Industry

AbstractIn 2013 the minimum agricultural wage in South Africa was increased by an unprecedented 51%. We use data on 77 Western Cape Province wine grape farms from 2005–2015 to estimate the impacts on employment. Previous post‐apartheid labour market reforms increased minimum wages substantially, but re‐entry to global markets after sanctions were lifted increased demand and this preserved jobs in the wine sector. However, by 2005 this demand growth had largely ceased. The long‐run wage elasticity for permanent employees was found to be −0.4, but for casual workers the figure was −4.7, so the 51% wage increase is likely to decimate casual employment in the future. Thus, the poorest and most vulnerable casual workers lose most in terms of jobs, incomes and secure livelihoods, whereas 80% of full‐time staff benefit from the higher minimum wages. Thus, the minimum wage change is likely to increase the gap between privileged permanent staff and casual workers. This result is not surprising in view of the long‐standing interdependence between farmers and their permanent workers in wine grape production.

Empirical Evidence of a Negative Marginal Product of Capital

If increased capital purchases lowers a firm's after-tax price of capital, the firm's marginal product of capital can be negative. The purpose of this paper is to explore empirical evidence of a negative marginal product of capital. Both macroeconomic evidence (Okun's Law) and microeconomic evidence (the wage elasticity of labor supply for individual firms) appear to imply a negative marginal product of capital for many if not most firms.

Beyond dualism: Agricultural productivity, small towns, and structural change in Bangladesh

This paper uses a framework that goes beyond rural-urban dualism and highlights the role of small-town economy in understanding structural change in a developing country. It provides a theoretical and empirical analysis of the role of agricultural productivity in structural transformation in the labor market in small towns and the surrounding rural areas. The empirical work is based on a general equilibrium model that formalizes the demand and labor market linkages: the small-town draws labor away from the rural areas to produce goods and services whose demand may depend largely on rural income. The theory clarifies the role played by the income elasticity of demand and the elasticity of wage with respect to productivity increase in agriculture. For productivity growth to lead to a demand effect, the wage elasticity has to be lower than a threshold. When the demand for goods and services produced in small towns comes mainly from the adjacent rural areas, the demand effect can outweigh the negative wage effect and lead to higher employment in the town-goods sector. The empirical analysis finds a significant positive effect of higher rainfall on rice yield and wages. Using rainfall shocks as a source of exogenous variation, we provide instrumental variables estimates of the effects of agricultural productivity on agricultural wages. The increase in wages is larger in the rural sample compared with the small town economy sample, but structural change in employment is more pronounced in the small town economy. In the rural sample, the positive employment effect is observed only in small-scale manufacturing and services. In contrast, a positive productivity shock in small towns sample has large and positive effect on employment in large scale manufacturing and services (construction, transport, education, and health). Agricultural productivity growth induces structural transformation within the services sector in small towns, with employment in skilled services growing at a faster pace than that in low skilled services.

Labour supply elasticities in New Zealand

ABSTRACTThe aim of this paper is to explore alternative labour supply elasticity concepts in cross-sectional contexts and to present empirical results for New Zealand. Emphasis is placed on the elasticity of hours worked with respect to a change in the gross wage rate, though it is shown that the gross wage elasticity is usually sufficient when considering labour supply responses to effective marginal tax rate changes. The elasticities presented here, for both intensive and extensive margins and for a range of demographic groups, are based on simulated labour supply responses to a proportional change in gross wage rates using the New Zealand Treasury's behavioural microsimulation model, Taxwell-B. This uses a discrete-hours random-utility specification of preferences. Comparisons are made with the only previous estimates for NZ. As for other countries, elasticities at the extensive margin are found to be larger than at the intensive margin.

Firms and Labor Market Inequality: Evidence and Some Theory

We synthesize two related literatures on firm-level drivers of wage inequality. Studies of rent sharing that use matched worker-firm data find elasticities of wages with respect to value added per worker in the range of 0.05–0.15. Studies of wage determination with worker and firm fixed effects typically find that firm-specific premiums explain 20% of overall wage variation. To interpret these findings, we develop a model of wage setting in which workers have idiosyncratic tastes for different workplaces. Simple versions of this model can rationalize standard fixed effects specifications and also match the typical rent-sharing elasticities in the literature.

Исследования российского рынка труда и экономическая политика

The paper summarizes the studies on the mechanisms of Russian labor market. The subjects under consideration include unemployment and wages formation, relationship between key labor market variables and inflation, and labor market adjustment to negative shocks. We demonstrate that the general feature of Russian labor market is its high flexibility, which shows itself a gradual decline of the NAIRU level, high elasticity of real wages by unemployment rate, rapid return to full employment after negative external shocks. Problems rooted in the labor market are specified (primarily declining labor supply and increasing labor share in GDP), their neglect can become a major impediment for economic growth if forceful measures based on the earlier and future research findings are not taken.

Downward Real Wage Rigidity and Equal Treatment Wage Contracts: Theory and Evidence

Recent dynamic contracting models of downward real wage rigidity with – newly hired workers cannot price themselves into jobs by undercutting incumbents – imply that real wages are relatively rigid in bad times but upwardly flexible during good times. We use an administrative panel dataset to establish that such asymmetries are a feature of West German labor markets. We find that the elasticity of real wages with respect to output is very close to zero in downswings but large and highly significant in upswings. In a separate analysis we find that after controlling for match fixed effects the cyclicality of new hire wages is approximately the same as that for incumbent wages regardless of whether or not they joined the establishment from unemployment This is supportive of equal treatment. We also show that a four parameter version of the equal treatment contracting model of Snell and Thomas (2010) can replicate reasonably well the salient time series properties and co-properties of real wages, output, and unemployment, in particular the asymmetric response of wages to output that we find in the data.

Gender Wage Gap and Education: Case in Indonesia’s Labor Market

The perspective gender wage gap weakens the labor market and deteriorates women’s life quality. Women not only receive lower salaries than men, but also have lower employment rate in many countries due to discrimination. The aims of this study was to analyze gender wage gap by using the 2008-2016 panel data from 34 province in Indonesia. This study used derivatives canonical model in CES production function form to identify gender wage gap and elasticity substitution to observe the ability of female worker substitution of male labor in two group level education. The result of the regression panel consistently indicate that the gender wage gap exists in Indonesia.

Agglomeration Economies in the Presence of an Informal Sector the Colombian Case

This paper analyzes the relationship between agglomeration economies and wages in the context of a developing country, taking into account the marked presence of the informal sector. Using data from Colombia, we investigate the effect of agglomeration economies on formal and informal productivity, inquiring whether the informal sector achieves benefits from agglomeration economies and whether there are differences between the formal and informal sectors in terms of agglomeration returns. We estimate an elasticity of wages with respect to employment density of around -4% for the formal sector, and around 3% for the informal sector. As such, agglomeration has a significantly positive effect on the productivity of the informal sector. The results show that informal workers' productivity in a city twice as dense is 2% greater, implying that wages in denser areas are 14% higher than in less dense areas. In contrast, for the formal sector, the results show that productivity in formal workers in a city twice as dense is of around 3% lower, leading such workers to earn 17% less in denser areas. Factors associated with the constraints relative to the creation of formal jobs, a greater labor supply of formal workers, and des-amenities very common in big cities in developing countries

Occupational Segregation and the (Mis)allocation of Talent

AbstractIn this paper, I study how occupational segregation affects the allocation of talent in a competitive labour market. I propose a model of occupational choice in which heterogeneous workers must rely on their social contacts to acquire job‐vacancy information. While occupational segregation implies benefits in terms of job‐finding probability, it also leads to allocative inefficiencies. Efficient and equilibrium outcomes differ due to a network externality that leads workers to segregate too little, and a pecuniary externality that leads workers to segregate too much. Which effect dominates depends on the elasticity of wages to changes in the degree of occupational segregation.

Optimal Taxation and Human Capital Policies over the Life Cycle

This paper derives optimal income tax and human capital policies in a life cycle model with risky human capital. The government faces asymmetric information regarding agents’ ability, its evolution, and labor supply. When the wage elasticity with respect to ability is increasing in human capital, the optimal subsidy involves less than full deductibility of human capital expenses on the tax base and falls with age. Income-contingent loans or a deferred deductibility scheme can implement the optimum. Numerical results suggest that full deductibility of expenses is close to optimal and that simple linear age-dependent policies perform very well.

Macroeconomic and structural properties of the Russian labor market: A cross-country comparison

Abstract We suggest a new way to identify salient features of the Russian labor market. Parameters of basic macroeconomic models pertinent to the Russian labor market are compared to a sample of other countries. We find that estimated values of Okun's coefficient and the elasticity of real wages to labor productivity in Russia are typical for emerging markets. What really distinguishes the labor market is that the elasticity of real wages relative to unemployment in Russia is very high by international standards. The overall conclusion is that the Russian labor market can be characterized by a combination of serious structural problems (such as low employee mobility, the significant size of the shadow sector, etc.) and solid macroeconomic performance, verified by the persistently low rate of unemployment in recent years.

Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study

We experimentally test how effort responds to wages—randomly assigned to accrue to individuals or to a charity—in the presence of expectations-based reference points or targets. When individuals earn money for themselves, higher wages lead to higher effort with relatively muted targeting behavior. When individuals earn money for a charity, higher wages instead lead to lower effort with substantial targeting behavior. A reference-dependent theoretical framework suggests an explanation for this differential impact: when individuals place less value on earnings, such as when accruing earnings for a charity instead of themselves, more targeting behavior and a more sluggish response to incentives should result. Results from an additional experiment add support to this explanation. When individuals select into earning money for a charity and thus likely place a higher value on those earnings, targeting behavior is muted and no longer generates a negative effort response to higher wages.Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2870 .This paper was accepted by Uri Gneezy, behavioral economics.

Constrained vs unconstrained labor supply: the economics of dual job holding

This paper develops a unified model of dual and unitary job holding based on a Stone-Geary utility function. The model incorporates both constrained and unconstrained labor supply. Panel data methods are adapted to accommodate unobserved heterogeneity and multinomial selection into six mutually exclusive labor supply regimes. We estimate the wage and income elasticities arising from selection and unobserved heterogeneity as well as from the Stone-Geary Slutsky equations. The labor supply model is estimated with data from the British Household Panel Survey 1991–2008. Among dual job holders, our study finds that the Stone-Geary income and wage elasticities are much larger for labor supply to the second job compared with the main job. When the effects of selection and unobserved heterogeneity are taken account of, the magnitudes of these elasticities on the second job tend to be significantly reduced.

The Value of Air Quality in Chinese Cities: Evidence from Labor and Property Market Outcomes

Using a dual-market sorting model of workers’ location decisions, this paper studies the capitalization of air pollution in wages and property prices across Chinese cities. To account for endogeneity of air pollution in the determination of wages and property prices, we exploit quasi-experimental variation in air quality induced by a policy subsidizing coal-based winter heating in northern China, and document a discontinuity in average air quality for cities located north and south of the policy boundary. Using data for all 288 Chinese cities in 2011, we estimate an equilibrium relationship between wages and house prices for the entire system of Chinese cities, and specify a regression discontinuity design to quantify how variation in air quality induced by the policy affects this relationship locally. Our preferred estimates of the elasticity of wages and house prices with respect to $$\text {PM}_{10}$$ concentration are 0.53 and $${-}$$ 0.71 respectively. At the average of our sample, the willingness to pay for a unit reduction in $$\text {PM}_{10}$$ concentration is CNY 261.28 ( $$\simeq $$ USD 40.50), with a significant share reflected in labor market outcomes.

Exporting and labour demand: Micro‐level evidence from Germany

AbstractIt is widely believed that globalization increases the extent of employment and wage responses to economic shocks. In this paper, we investigate the effect of firms’ exporting activities on the wage elasticity of labour demand. Using rich, administrative linked employer–employee panel data from Germany and destination‐specific industry‐level information on trade flows, we explicitly control for self‐selection into exporting and endogeneity concerns. Overall, we find that exporting has a significant positive effect on the (absolute value of the) unconditional wage elasticity of labour demand. In line with our hypothesis, we further show that the effect is particularly strong for those plants that export a significant share of their output to low‐ and medium‐income countries, hence face relatively more price‐elastic product demand.

What factors affect physicians' labour supply: Comparing structural discrete choice and reduced-form approaches.

Little is known about the response of physicians to changes in compensation: Do increases in compensation increase or decrease labour supply? In this paper, we estimate wage elasticities for physicians. We apply both a structural discrete choice approach and a reduced-form approach to examine how these different approaches affect wage elasticities at the intensive margin. Using uniquely rich data collected from a large sample of general practitioners (GPs) and specialists in Australia, we estimate 3 alternative utility specifications (quadratic, translog, and box-cox utility functions) in the structural approach, as well as a reduced-form specification, separately for men and women. Australian data is particularly suited for this analysis due to a lack of regulation of physicians' fees leading to variation in earnings. All models predict small negative wage elasticities for male and female GPs and specialists passing several sensitivity checks. For this high-income and long-working-hours population, the translog and box-cox utility functions outperform the quadratic utility function. Simulating the effects of 5% and 10% wage increases at the intensive margin slightly reduces the full-time equivalent supply of male GPs, and to a lesser extent of male specialists and female GPs.