The Economics of Wage Floors

This paper contains a theoretical analysis of and summaries of empirical information on consequences of wage floors in the labor market imposed by minimum wages and by labor unions. Excess supplies are rationed in part probabilistically ("first come, first served"), and in part systematically -- by raising hiring standards, or by discrimination and nepotism. Effects on employment, unemployment, and labor force participation, and on wage differentials between the II covered'' and the free sector follow. Empirical information on these effects is cited in the minimum wage case, but only wage differentials are analyzed in the union context. Other consequences outlined here are: lengthening of school attendance, reduction of hours of work, substitution of paid out wages for fringes in the minimum wage case. However, union pressure on fringes is greater than on wages. This strategy produces larger income and greater job security for union members. The minimum wage reduces opportunities for job training and consequent wage growth. Quits initially decline as wages are pushed up, but turnover is likely to increase as the training content of jobs is reduced. Union wage and fringe advantages reduce quits significantly. However, training as well as wage growth are reduced.

Job Training: Costs, Returns, and Wage Profiles

Using information on time costs of training and gains in wages attributable to training I computed rates of return on training investments. The range of estimates based on several data sets generally exceeds the magnitudes of rates of return usually observed for schooling investments. It is not clear, however, that the difference represents underinvestment in job training. Two methods were used to estimate total annual costs of job training in the U.S. economy, for 1958, 1976, and 1987. The "direct' calculation uses information on time spent in training and on wages. For 1976 so calculated costs amounted to 11.2% of Total Employee Compensation and a half of costs of school education. In the "indirect" method training costs were estimated from wage functions fitted to PSID data. In 1976 the direct estimate amounted to between 65% and 80% of the indirect estimate based on the wage profile. This result represents strong support for the human capital interpretation of wage profiles. The estimates indicate a slower growth of training than of school expenditures in the past decades. Substitution of schooling for job training is a likely cause.