Minimum Wages and Relational Contracts

Fahn, Matthias (März 2014): Minimum Wages and Relational Contracts. Münchener Wirtschaftswissenschaftliche Beiträge (VWL) 2014-11

Abstract

The need to give incentives is usually absent in the literature on minimum wages. However, especially in the service sector it is important how well a job is done, and employees must be incentivized to perform accordingly. Furthermore, many aspects regarding service quality cannot be verified, which implies that relational contracts have to be used to provide incentives. The present article shows that in this case, a minimum wage increases implemented effort, i.e., realized service quality, as well as the efficiency of an employment relationship. Hence, this paper can explain why productivity and service quality went up after the introduction of the British National Minimum Wage, and that this might actually have caused a more efficient labor market. Furthermore, several empirically observed implications of a (higher) minimum wage can be explained. It might reduce turnover of employees, have spillover effects on higher wages, and reduce wage dispersion.

• Dokumententyp: Paper
• Keywords: Minimum Wages; Relational Contracts
• Fakultät: Volkswirtschaft > Munich Discussion Papers in Economics
• Themengebiete: 300 Sozialwissenschaften > 330 Wirtschaft
• JEL Classification: C73, D21, J24, J31
• Sprache: Englisch

Literaturliste

Abreu, D. “On the Theory of Infinitely Repeated Games with Discounting.” Econometrica, Vol. 56 (1988), pp. 383-396.

[Abreu, D., Pearce, D., Stacchetti, E. “Towards a Theory of Discounted Repeated Games with Imperfect Monitoring.” Econometrica, Vol. 58 (1990), pp. 1041-1063.

Bhashkar, T., To, T. “Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition.” Economic Journal, Vol. 109 (1999), pp. 190-203.

Board, S., Meyer-ter-Vehn M. “Relational Contracts in Competitive Labor Markets.” Mimeo, UCLA, 2013.

Brown, C., Gilroy, C., Kohen, A., “The Effect of the Minimum Wage on Employment and Unemployment.” Journal of Economic Literature, Vol. 20 (1982), pp. 487-528.

Brown, C. “Minimum Wages, Employment, and the Distribution of Income.” In O.C.Ashenfelter and D. Card, eds., The Handbook of Labor Economics, Vol. 3, Part 2, Elsevier, 1999.

Bull, C. “The Existence of Self-Enforcing Implicit Contracts.” Quarterly Journal of Economics, Vol. 102 (1987), pp. 147-159.

Burdett, K., Mortensen, D.T., “Wage Differentials, Employer Size, and Unemployment.” International Economic Review, Vol. 39 (1998), pp. 257-273.

Card, D., Krueger, A.B. “Minimum Wages and Employment: A Case Study of the Fast- Food Industry in New Jersey and Pennsylvania.” American Economic Review, Vol. 84 (1994), pp. 772-793.

Card, D., Krueger, A.B., eds. Myth and Measurement. The New Economics of the Mini- mum Wage. Princeton: Princeton University Press, 1995.

Dittrich, M., Knabe, A. “Wage and Employment Effects of Non-Binding Minimum Wages.” CESifo Working Paper No. 3149, Muenchen., 2010.

Draca, M., Machin, S., Van Reenen, J. “Minimum Wages and Profitability.” American Economic Journal: Applied Economics, Vol. 3 (2011), pp. 129-151.

Dube, A., Lester, T.W., Reich, M. “Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties.” The Review of Economics and Statistics, Vol. 92 (201), pp. 945-964.

Dube, A., Lester, T.W., Reich, M. “Do Frictions Matter in the Labor Market? Accessions, Separations and Minimum Wage Effects.” Working Paper, Institute for Labor and Employment, UC Berkeley, 2011.

Dube, A., Naidu, S., Reich, M. “The Economic Effects of Citywide Minimum Wages.” Industrial and Labor Relations Review, Vol. 60 (2007), pp. 522-543.

Falk, A., Fehr, E., Zehnder, C. “Fariness Perceptions and Reservation Wages - The Behavioral Effects of Minimum Wage Laws.” Quarterly Journal of Economics, Vol. 121 (2006), pp. 1347-1381.

Flinn, C. “Wage and Job Mobility of Young Workers.” Journal of Political Economy, Vol. 94 (1986), pp. 88-110.

Flinn, C. “Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates.” Econometrica, Vol. 74 (2006), pp. 1013-1062.

Freeman, Richard B. _The Minimum Wage as a Redistributive Tool.” Economic Journal, Vol. 436 (1996), pp. 639-649.

Fong, Y., Li, J. “Relational Contracts, Efficiency Wages, and Employment Dynamics.” Mimeo, Northwestern University, 2010.

Galindo-Rueda, F., Pereira, S. “The Impact of the National Minimum Wage on British Firms.” Final Report to the Low Pay Commission on the Econometric Evidence from the Annual Respondents Database (2004).

Ghosh, P., Ray, D. “Cooperation in Community Interaction without Information Flow”, The Review of Economic Studies, Vol. 63 (1996), pp. 491-519.

Grossberg, A.J., Sicilian, P. “Do Legal Minimum Wages Create Rents? A Re-examination of the Evidence.” Southern Economic Journal, Vol. 69 (1993), pp. 201-209.

Grossman, J.B. “The Impact of the Minimum Wage on Other Wages.” Journal of Human Resources, Vol. 18 (1983), pp. 359-378.

Heyes, J., Gray, A. “The implications of the national minimum wage for training in small firms.” Human Resource Management Journal, Vol. 13 (2003), pp. 76-86.

Holzer, H.J., Katz, L.K., Krueger, A.B. “Job Queues and Wages.” Quarterly Journal of Economics, Vol. 106 (1991), pp. 739-768.

Kadan, O., Swinkels, J. M. “Minimum Payments and Induced Effort in Moral Hazard Problems.” Mimeo, Northwestern University, 2009.

Kadan, O., Swinkels, J. M. “Minimum Payments, Incentives, and Markets.” Mimeo, Northwestern University, 2010.

Katz, L., Krueger, A.B. “The Effect of the Minimum Wage on the Fast Food Industry.” Industrial and Labor Relations Review, Vol. 46 (1998), pp. 6-21.

Kranton, R. “The Formation of Cooperative Relationships”, Journal of Law, Economics and Organization, Vol. 12 (1996), pp. 214-233.

Lee, D.S. “Wage Inequality in the United States During the 1980s: Rising Dispersion or Falling Minimum Wage?”. Quarterly Journal of Economics, Vol. 114 (1999), pp. 977-1023.

Levin, J. “Multilateral Contracting and the Employment Relationship.” Quarterly Journal of Economics, Vol. 117 (2002), pp. 1075-1103.

Levin, J. “Relational Incentive Contracts.” American Economic Review, Vol. 93 (2003), pp. 835-857.

Low Pay Commission “The National MinimumWage - Making a Difference.” Third Report of the Low Pay Commission, Vol. 1 (2001).

Machin, S., Manning, A. “The Effects of Minimum Wages on Wage Dispersion and Employment: Evidence from the U.K. Wage Councils.” Industrial and Labor Relations Re- view, Vol. 47 (1994), pp. 319-329.

Machin, S., Manning, A., Rahman, L. “Where the Minimum Wage Bites Hard: Introduction of Minimum Wages to a Low Wage Sector.” Journal of the European Economic Association, Vol. 1 (2003), pp. 154-180.

Manning, A., ed. Monopsony in Motion: Imperfect Competition in Labor Markets. Prince- ton: Princeton University Press, 2003.

MacLeod, W.B., “Optimal Contracting with Subjective Evaluation.” American Economic Review, Vol. 93 (2003), pp. 216-240.

MacLeod, W.B., Malcomson, J.M. “Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment.” Econometrica, Vol. 57 (1989), pp. 447-480.

MacLeod, W.B., Malcomson, J.M. “Motivation and Markets.” American Economic Re- view, Vol. 88 (1998), pp. 388-411.

Miller, R. “Job Matching and Occupational Choice.” Journal of Political Economy, Vol. 92 (1984), pp. 1086-1120.

Neumark, D., Wascher, W.L. “Minimum Wages and Employment.” IZA Discussion Paper 2570, 2007.

Neumark, D., Wascher, W.L., eds. Minimum Wages. Cambridge: MIT Press, 2008.

Portugal, P., Cardoso, A.R. “Disentangling the Minimum Wage Puzzle: An Analysis of Worker Accessions and Separations.” Journal of the European Economic Association, Vol. 4 (2006), pp. 988-1013.

Radner, R. “Monitoring Cooperative Agreements in a Repeated Principal-Agent Relationship.” Econometrica, Vol. 49 (1981), pp. 1127-1148.

Rebitzer, J.B., Taylor, L.J. “The Consequences of Minimum Wage Laws - Some New Theoretical Ideas.” Journal of Public Economics, Vol. 56 (1995), pp. 245-255.

Rizov, M., Croucher, R. “The impact of the UK national minimum wage on productivity by low-paying sectors and firm-size groups.” Report to the Low Pay Commission (2011).

Strobl, E., Walsh, F. “The ambiguous effect of minimum wages on hours.” Labour Eco- nomics, Vol. 18 (2011), pp. 218-228.

Watson, J. “Starting Small and Renegotiation”. Journal of Economic Theory, Vol. 85(1999), pp. 52-90.

Yang, H. “Efficiency Wages and Subjective Performance Pay.” Economic Inquiry, Vol. 46 (2008), pp. 179-196.

Yang, H. “Nonstationary Relational Contracts with Adverse Selection.” International Eco- nomic Review, Vol. 54 (2013), pp. 525-547.