Scandinavian Working Papers in Economics

Working Paper Series, Center for Labor Studies,
Uppsala University, Department of Economics

No 2010:10: Rational Expectations and the Puzzling No-E¤ect of the Minimum Wage

Sara Pinoli ()
Additional contact information
Sara Pinoli: Uppsala Center for Labor Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: This paper argues that expectations are an important element that need to be in- cluded into the analysis of the e¤ects of the minimum wage on employment. We show in a standard matching model that the observed employment e¤ect is higher the lower is the likelihood associated with the minimum wage variation. On the other side, there is a signi…cant anticipation e¤ect, ignored in the literature. This property is able to explain the controversial results found in the empirical studies. When the policy is anticipated, the e¤ect at the time of the actual variation is small and potentially hard to identify. The model is tested on Spanish data, taking advantage of the unexpected change in the minimum wage following the election of Zapatero in 2004.

Keywords: Minimum wage; Expectations; Heterogeneous matches

JEL-codes: D21; J23; J38

59 pages, June 30, 2010

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