Indexation of the Minimum Wage with Rational Expectations / Herschel I. Grossman.

By:

Grossman, Herschel I

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w0653.Publication details: Cambridge, Mass. National Bureau of Economic Research 1981.Description: 1 online resource: illustrations (black and white)Subject(s):

J - Labor and Demographic Economics

Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: This paper considers the possible employment effects of reforming minimum-wage policy to incorporate indexation of the nominal minimum wage .The analysis assumes that both the demand for the labor services of minimum-wage workers and the setting of the nominal minimum wage rate under existing policy depend in part on rational expectations of future average wage rates. The analysis implies that, if the indexation ratio of the nominal minimum wage to the recent-past average wage rate were large relative both to the level and trend of the expected rate of average wage inflation and to the existing relative minimum-wage target, indexation would decrease the average level over time of minimum-wage employment. The analysis also implies that, if the year-to-year variation in expected wage inflation were large relative to the year-to-year variation in unexpected wage inflation, indexation would increase the year-to-year variation in minimum-wage employment.

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Working Paper	Biblioteca Digital	Colección NBER	nber w0653 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w0650 Some Theoretical Aspects of Base Control /	nber w0651 Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets /	nber w0652 The Federal Minimum Wage, Inflation, and Employment /	nber w0653 Indexation of the Minimum Wage with Rational Expectations /	nber w0654 Early Retirement Pension Benefits /	nber w0655 The Effects of Government Regulation on Teenage Smoking /	nber w0656 Minimum Wages and the Demand for Labor /	Next

April 1981.

This paper considers the possible employment effects of reforming minimum-wage policy to incorporate indexation of the nominal minimum wage .The analysis assumes that both the demand for the labor services of minimum-wage workers and the setting of the nominal minimum wage rate under existing policy depend in part on rational expectations of future average wage rates. The analysis implies that, if the indexation ratio of the nominal minimum wage to the recent-past average wage rate were large relative both to the level and trend of the expected rate of average wage inflation and to the existing relative minimum-wage target, indexation would decrease the average level over time of minimum-wage employment. The analysis also implies that, if the year-to-year variation in expected wage inflation were large relative to the year-to-year variation in unexpected wage inflation, indexation would increase the year-to-year variation in minimum-wage employment.