There is no evidence that increases in the
minimum wage have hurt immigrants
According to economic theory, a minimum wage
reduces the number of low-wage jobs and increases the number of available
workers, allowing greater hiring selectivity. More competition for a smaller
number of low-wage jobs will disadvantage immigrants if employers perceive
them as less skilled than native-born workers—and vice versa. Studies
indicate that a higher minimum wage does not hurt immigrants, but there is
no consensus on whether immigrants benefit at the expense of natives.
Studies also reach disparate conclusions on whether higher minimum wages
attract or repel immigrants.
Extending provisions of collective contracts to all
workers in an industry or region may lead to employment losses
In many countries, the minimum wages and working
conditions set in collective bargaining contracts negotiated by a limited set of
employers and unions are subsequently extended to all the employees in an industry.
Those extensions ensure common working conditions within the industry, limit wage
inequality, and reduce gender wage gaps. However, several studies suggest that those
benefits come at the cost of reduced employment levels, especially during recessions.
The income losses of workers who are displaced because of a collective contract
extension can offset the wage gains among workers who keep their jobs.
Better understanding of skills mismatch is
essential to finding effective policy options
Evidence suggests that productivity would be
much higher and unemployment much lower if the supply of and demand for
skills were better matched. As a result, skills mismatch between workers
(supply) and jobs (demand) commands the ongoing attention of policymakers in
many countries. Policies intended to address the persistence of skills
mismatch focus on the supply side of the issue by emphasizing worker
education and training. However, the role of the demand side, that is,
employers’ wage-setting practices, garners comparatively little policy
To boost the employment rate of the low-skilled
trapped in inactivity is it sufficient to supplement their earnings?
High risk of poverty and low employment rates
are widespread among low-skilled groups, especially in the case of some
household compositions (e.g. single mothers). “Making-work-pay” policies
have been advocated for and implemented to address these issues. They
alleviate the above-mentioned problems without providing a disincentive to
work. However, do they deliver on their promises? If they do reduce poverty
and enhance employment, can we further determine their effects on indicators
of well-being, such as mental health and life satisfaction, or on the
acquisition of human capital?
Households can benefit from international trade
as it lowers the prices of consumer goods
Imported products tend to have lower prices than
locally produced ones for a variety of reasons, including lower labor costs
and better technology in the exporting country. The reduced prices may lead
to wage losses for individuals who work in the production of a local version
of the imported item. On the other hand, lower prices may be beneficial to
households if the cheaper product is in their consumption basket. These
welfare gains through consumption, on average, are found to be larger in
magnitude than the wage effect for some developing countries.
When workers and firms cannot commit to
long-term contracts and capital investments are sunk, union power can reduce
Although coverage of collective bargaining
agreements has been declining for decades in most countries, it is still
extensive, especially in non-Anglo-Saxon countries. Strong unions may
influence firms’ incentives to invest in capital, particularly in sectors
where capital investments are sunk (irreversible), as in research-intensive
sectors. Whether unions affect firms’ investment in capital depends on the
structure and coordination of bargaining, the preference of unions between
wages and employment, the quality of labor-management relations, and the
existence of social pacts, among other factors.
Studies of independent contractors suggest that
workers’ effort may be more responsive to wage incentives than previously
A fundamental question in economic policy is how
labor supply responds to changes in remuneration. The responsiveness of
labor supply determines the size of the employment impact and efficiency
loss of progressive income taxation. It also affects predictions about the
impacts of policies ranging from fiscal responses to business cycles to
government transfer programs. The characteristics of jobs held by
independent contractors provide an opportunity to overcome problems faced by
earlier studies and help answer this fundamental question.
Monopsony models question the classic view of
wage-setting and reveal a new reason why wages may decrease during
Traditional models of the labor market typically
assume that wages are set by the market, not the firm. However, over the
last 15 years, a growing body of empirical research has provided evidence
against this assumption. Recent studies suggest that a monopsonistic model,
where individual firms and not the market set wages, may be more
appropriate. This model attributes more wage-setting power to firms,
particularly during economic downturns, which helps explain why wages
decrease during recessions. This holds important implications for
policymakers attempting to combat lost worker income during economic
Are low-paid jobs stepping stones to higher paid
jobs, do they become persistent, or do they lead to recurring
Low-wage employment has become an important
feature of the labor market and a controversial topic for debate in many
countries. How to interpret the prominence of low-paid jobs and whether they
are beneficial to workers or society is currently an open question. The
answer depends on whether low-paid jobs are largely transitory and serve as
stepping stones to higher-paid employment, whether they become persistent,
or whether they result in repeated unemployment. The empirical evidence is
mixed, pointing to both stepping-stone effects and “scarring” effects (i.e.
long-lasting detrimental effects) of low-paid work.
Wages affect productivity and non-wage costs;
this carries important labor market and policy implications
Higher wages increase labor costs but also
improve the productivity of the labor force in several ways. If firms take
this into account and set their wages accordingly, the resulting wages could
fail to adjust demand and supply but may induce phenomena like
over-education, discrimination, regional wage differentials, and a tendency
for larger firms to pay higher wages. All these phenomena are quantitatively
important and well-established empirically. Efficiency wage theory provides
an integrated theoretical explanation rather than a sundry list of reasons,
and offers an efficiency argument for progressive income taxation.