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Rational Expectations and the Puzzling No-Effect of the Minimum Wage

Pinoli, Sara (2008): Rational Expectations and the Puzzling No-Effect of the Minimum Wage.

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Abstract

This paper argues that expectations are an important element that need to be included into the analysis of the effects of the minimum wage on employment. We show in a standard matching model that these effects are higher the lower is the likelihood associated to the minimum wage variation. This property also helps explaining the controversial results found in the empirical literature. When the policy is anticipated, the observed effect at the time of the actual variation is small and hard to identify. The model is tested on Spanish data, taking advantage of the unexpected change in the minimum wage following the election of Zapatero in 2004.

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