EFFECT OF MINIMUM WAGES ON THE NAIRU
examines the effect of minimum wages on the Non-Accelerating Inflation Rate of
Unemployment, or NAIRU.
The first chapter is empirical, examining whether minimum wages raise the
NAIRU. I find that the level of the
minimum wage is highly significant in regressions explaining nominal wage
growth. Because this inflationary
effect can be offset by increased unemployment, the minimum wage raises the
NAIRU. A reduction in the relative minimum wage seems to account for
a reduction in the NAIRU of about 1 1/2 percentage points in the USA over the
last two decades. Meanwhile, a
compression of wage relativities has increased the NAIRU in continental Europe.
These estimated effects are robust to variations in policy, controls,
sample period and model specification. They
are corroborated by a wide range of additional information.
The second chapter discusses some related empirical results.
The third chapter examines how these empirical results should be
interpreted. Perhaps the most
important explanation is that the minimum wage provides a safety net,
facilitating aggressive wage bargaining. The
low level of the minimum wage over the last decade seems to have made workers
more afraid of large wage reductions should they lose their job.
This insecurity seems to account for a large reduction in the NAIRU.
The minimum wage also increases the NAIRU by reducing labor demand and
through maintenance of wage relativities.