Do higher minimum wages induce more search?

Monopsony models generally imply they should, and that is part of the argument why minimum wage hikes might be good for workers, wages, and yes even employment.  But the data don’t seem to support the claim of more search behavior:

Labor market search-and-matching models posit supply-side responses to minimum wage increases that may lead to improved matches and lessen or even reverse negative employment effects. Yet there is no empirical evidence on this crucial assumption. Using event study analysis of recent minimum wage increases, we find that increases to minimum wage do not increase the likelihood of searching, but do lead to large yet very transitory spikes in search effort by individuals already looking for work. The results are not driven by changes in the composition of searchers.

That is from a new NBER Working Paper by Camilla Adams, Jonathan Meer, and Carly Will Sloan.


The trouble with this assumption "supply-side responses to minimum wage increases that may lead to improved matches and lessen or even reverse negative employment effects" is that it assumes a linear response to increased wages: firms will search proportionally harder for the best candidate, the higher the wages go. But, like people selecting their mate for marriage, or landlords like my 1% family picking tenants, it may be that cost or price doesn't matter; people don't really spend more time finding the best mate or picking the best tenant but simply take the best candidate after a few tries. One example: people who marry their "high school sweetheart" (and don't search more for an even better match), or another example, in renting our DC properties: we don't take the first person who replies, but we do take the second (mathematically, out of ten candidates it is said, using fancy math, that 3-5 tries is sufficient to find the best candidate). But we rarely wait until say ten tenants have expressed interest, though we have hot properties, since the second tenant may find another place unless you accept their offer. Same with workers: why search for months? The "OK" candidate may get pissed and look elsewhere, especially in a hot market like today's.

Bonus trivia: did Henry Ford really offer a higher than normal wage of $5 to keep the best workers happy, or, did wages simply go up since Ford's factories were doing so well, sucking up all available labour? Recall Detroit became a magnet for the entire country, drawing in unemployed people even from the Deep South. This shows a severe labor shortage.

I find it strange that people resort to what is essentially a Google search to find a mate. In times past people found a mate based on what they had in common, same high school or college, same place of worship, same place of employment, etc. Sharing something in common likely improves the chances of a long-term relationship. In my long-time circle of friends, everyone was a lawyer except for my wife. Lawyers marry lawyers, physicians marry physicians, even some economists marry economists. It's partly opportunity, but also the common interest that attracts mates. How that is replicated in a Google search escapes me.

Here's an anecdote about the consequences of a sudden spike in starting salaries. When I first started as a lawyer, young lawyers were paid a paltry sum (even by the best firms). It was understood that the new lawyer was essentially an apprentice, the payoff coming when elevated to partner, a lifetime commitment by both firm and partner. Then the law business exploded, with huge leaps in revenues, and the competition among firms for the best talent led to huge leaps in starting salaries. The leaps in starting salaries was so huge that it resulted in first year lawyers being paid more than lawyers with two or three years of experience. Since their are no secrets when it comes to compensation, soon enough the disparity was discovered and chaos ensued. Lateral moves became the norm. As expenses at the bottom grew, so did the pressure on the lawyers to generate revenues. Those who didn't, including partners, were let go. The collegial law firm suddenly wasn't so collegial any more. Who knew that a sudden leap in starting salaries for new lawyers would set off a chain reaction that changed the law business forever. And in ways not so great.

@rayward - yes, it was quite a shock in the early 00s when a lot of patent law firms went out of business, just to mention a few without Googling it, the Brobeck firm and Lyon & Lyon.

Bonus trivia: while it's true that the now famous Skadden, Arps law firm initially had initials on their letterhead that spelled A.S.S., not unlike the GMU Antonin Scalia School of Law (A.S.S.), it's not true there's a firm called "Dewey, Cheatum & Howe". I wish there was.

It makes no sense to think they would increase search efforts. If job A pays $10 an hour, and job B pays $15, then a person holding job A now has no reason to search if the minimum wage cause his pay to rise to match B. Formerly a person with a skill level at B would have a reason to search to move up to a higher paying job. After a min wage increase he wouldn't. The jobs would be equivalent.

The labor market may not work like simple supply & demand, but has a strong social element of people paying & receiving what's expected of people at that level. If the pay level changes, especially at the top & bottom ends, that may not change supply or demand at that level because there is nowhere else for the people at the top & bottom ends of the labor market to go.

Perhaps I should add that I know that severe minimum wage hikes can induce a jobs reduction, but a severe hike can pull the minimum wage away from merely the bottom end of the labor market.

Comments for this post are closed