Minimum Wages and Job Search: What Do Employment Effects Really Measure


In this study, Drs. Peter Arcidiacono and Thomas Ahn investigate claims of positive employment effects resulting from a minimum wage. The study first highlights the multitude of reasons why, under the classical economic model—the widely accepted model of economic behavior—an increase in the minimum wage cannot lead to an increase in employment. Then, by relaxing certain assumptions critical to the classical model, a search model is constructed. This model—which runs contrary to commonly accepted economic theory—is created to study a hypothetical situation of positive employment effects from a minimum wage increase? Even in this case, the authors show that those individuals who most value minimum wage jobs—current employees—end up with a higher probability of being unemployed after a minimum wage increase. In fact, all increases in the minimum wage under
this model result in decreased employment prospects for individuals.

The authors conclude that the overall employment
level does not fully describe the negative effects resulting from a minimum wage increase? Instead, this antipoverty policy should be judged by its effect on the group it is attempting to help—current minimum wage employees. Examining the distributional employment results reveals that minimum wage increases decrease employment opportunities for current employees—the very individuals these policies are attempting to help. This decreased probability of employment is a result of increased labor force participation by teenagers from wealthy families.