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| Author: | Teulings, C.N. |
| Title: | Aggregation bias in elasticities of substitution and the minimum wage paradox |
| Journal: | International Economic Review
2000 : MAY, VOL. 41:2, p. 359-398 |
| Index terms: | Minimum wage Economic theory Models Elasticity of demand USA |
| Freeterms: | Estimation bias |
| Language: | eng |
| Abstract: | While the employment effects of minimum wages are usually reported to be small, direct estimates suggest a much larger degree of substitutability. It is argued that this paradox is largely due to a bias induced by the aggregation of skilled types into broad categories. An assignment model is applied were skilled workers have a comparative advantage in complex jobs. The implied pattern of substitutability reveals the sources of the bias. Estimation results for the U.S. show elasticities of complementarity to be underestimated by up to a factor 2.5. The methods laid out likewise can be applied to other markets were different quality types are close substitutes, such as the housing market. |
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