The Behavioral Effects of Minimum Wages∗
The prevailing labor market models assume that minimum wages do not affect the labor
supply schedule. We challenge this view in this paper by showing experimentally that
minimum wages have significant and lasting effects on subjects’ reservation wages. The
temporary introduction of a minimum wage leads to a rise in subjects’ reservation wages
which persists even after the minimum wage has been removed. Firms are therefore forced
to pay higher wages after the removal of the minimum wage than before its introduction. As a
consequence, the employment effects of removing the minimum wage are significantly
smaller than are the effects of its introduction. The impact of minimum wages on reservation
wages may also explain the anomalously low utilization of subminimum wages if employers
are given the opportunity of paying less than a minimum wage previously introduced. It may
further explain why employers often increase workers' wages after an increase in the
minimum wage by an amount exceeding that necessary for compliance with the higher
minimum. At a more general level, our results suggest that economic policy may affect
people’s behavior by shaping the perception of what is a fair transaction and by creating
entitlement effects.