What Does the Minimum Wage Do?

8 - Gross Flows in the Labor Market

343 8 Gross Flows in the Labor Market As both the survey and meta-analysis of employment studies indicate , the effect of the minimum wage on employment is at most small. One way to understand why this is so is to examine the effect of the minimum wage on gross flows—the flows into and out of employment over time. If Empt is employment at a single moment, say, the beginning of year t, Equation (8.1) defines the change in employment during year t: (8.1) dEmpt = Empt +1 − Empt The first thing to notice about this is that the two variables on the right are stock variables, measured at different moments of time, while dEmpt on the left is a flow variable, measured over the period separating the two stock variables. The second is that even as definitions go, it is not especially interesting. However, rearranging to read (8.2) Empt +1 = Empt + dEmpt redirects our attention. Employment at the beginning of year t + 1 is determined by employment one year earlier and the change in employment over the intervening year. The flow variable, dEmpt , is the net change in employment during year t. A useful next step is to decompose it into its positive and negative components, the gross changes or gross flows, and separately examine their responses to the minimum wage. The positive gross flow is accessions, the number of people who are working in positions at the beginning of one year that they were not working in at the beginning of the previous year. The jobs in question may have existed, but someone else may have been working in them; or they may be newly created, perhaps as a result of a firm that opened for business during the year; or they may result from an expansion or reorganization at a firm that was already in business at the year’s start. The negative gross flow is separations, the number of people who at the end of the year are no longer working in the same position as at the Belman and Wolfson.indb 343 Belman and Wolfson.indb 343 6/16/2014 12:18:13 PM 6/16/2014 12:18:13 PM 344 Belman and Wolfson beginning. Some separations consist of positions that no longer exist, either at firms that downsized their workforces or that are no longer in business. Others are positions that not only existed previously but continue to be occupied, just not by the same person as before.1 As defined here, both accessions and separations are quantities, but each can also be defined as a rate, where the quantity is divided by employment at the beginning of the year. The accession rate, Accessionst /Empt, is the number of people who move into new jobs during the year (the number of accessions) divided by employment at the start of the year. The separations rate is Separationst /Empt . The result is either of the following equations: (8.3a) dEmpt = Accessionst − Separationst (8.3b) dEmpt = Accessionst − Separationst Empt Empt Empt When employment is growing over time, dEmpt , the change in employment, is positive and accessions exceed separation; when employment is shrinking, dEmpt is negative and separations exceed accessions. Table 8.1 lists one dozen studies of gross labor market flows. For descriptive purposes, studies of gross flows can be organized into three groups. Analyses in the first group rely on models of the labor market other than a perfectly competitive one. Pinoli (2010); Portugal and Cardoso (2006); and Dube, Lester, and Reich (2012) appeal to search models that incorporate frictions so that minimum wage increases have the potential for increasing employment. Georgiadis (2013) examines efficiency wage models in which it is cost minimizing for firms to pay a higher than competitive wage. Studies in the second group make no appeal to any theoretical model of the labor market: Dube, Naidu, and Reich (2007); Thompson (2009); and Skedinger (2006). Giuliano (2013) straddles the two groups, taking an agnostic view of these models . Studies in the third group focus on quits, a part of separations; because most of these studies predate the NMWR and grow out of a different literature, human capital and compensation, they are treated separately in the last section of this chapter. Belman and Wolfson.indb 344 Belman and Wolfson.indb 344 6/16/2014 12:18:15 PM 6/16/2014 12:18:15 PM Gross Flows in...