Minimum Wages, (Mis)Allocation of Labour, and Inequality

ended

Over the last two decades, wage and income inequality have increased sharply in most developed countries which is causing ever greater concern in the economic and political debate. A central challenge for policymakers is to develop measures that can simultaneously improve the distribution of economic resources and also foster economic growth. In our proposed research, we will study the effectiveness of a particular prominent instrument to achieve this goal - the minimum wage. First, we will provide a comprehensive assessment of how minimum wages affect the allocation of resources. We will examine whether minimum wages improve the efficiency of worker-firm sorting by reallocating workers to more efficient firms, how an increase in mandated wage floors ripples through the wage distribution and affects job flows among firms, and how the policy affects the assortativity of firm-to-firm relationships. Second, we will look at the impact of the minimum wage on different groups in the population by studying its effect on the allocation of jobs among immigrant and native workers. Recent research suggests that there is a link between inequality and intergenerational mobility but whether public policies that alleviate inequality can also contribute to higher intergenerational mobility remains an open question. To fill this gap in the literature, we will study the effect of minimum wages on maternal labour supply, on child development and eventually on intergenerational mobility. The comprehensive agenda outlined in this proposal therefore addresses a more general call for understanding the roots of inequality and for unbundling the structure of low-wage labour markets. We will achieve this by exploiting a combination of high-quality data, unique policy changes and richer models that explicitly consider the role of firms, their wage setting power, and the networks they are operating in.