Sunday, 20 June 2010

Expectations and the employment effect of minimum wages

From the Economic Logic blog comes this comment on Expectations and the employment effect of minimum wages. In many markets it is known that anticipated changes in policy can have different effects to unanticipated changes in policy.
Sara Polini applies this idea to labor markets and specifically to the anticipation of movements in the minimum wage. She builds a search and matching model and applies it to Spain where minimum wage changes are usually anticipated, but occasionally not, like after the 2004 terrorist attack that lead to a surprise Socialist government. Anticipated changes lead to a reduction in employment, while unanticipated ones do not. This reconciles the ambiguous and inconclusive results in the literature, which ignored whether changes were anticipated or not.
But what happens over time, presumably unanticipated changes will have to be adjusted for at some point in the future.

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