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Efficiency wages and the economic effects of the minimum wage: evidence from a low-wage labour market

By Andreas Georgiadis

Abstract

We exploit a natural experiment provided by the 1990 introduction of the UK National Minimum Wage (NMW) to investigate the relationship between wages and monitoring and to test for Efficiency Wages considerations in a low-wage sector, the UK residential care homes industry. Our findings seem to support the wage-supervision trade-off prediction of the shirking model, and that employers didn't dissipate minimum wage rents by increasing work intensity or effort requirements on the job. Estimation results suggest that higher wage costs were more than offset by lower monitoring costs, and thus the overall evidence imply that the NMW may have operated as an Efficiency Wage. These findings support Efficiency Wage models used to explain a non-negative employment effect of the Minimum Wage and provide an explanation of recent evidence from the care homes sector that although the wage structure was heavily affected by the NMW introduction, there were moderate employment effects

Topics: HD Industries. Land use. Labor
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Year: 2008
OAI identifier: oai:eprints.lse.ac.uk:19628
Provided by: LSE Research Online

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