Elena Pastorino, Stanford University

The Distributional Impact of the Minimum Wage in the Short and Long Run
(joint w/Erik Hurst, Patrick Kehoe & Thomas Winberry)

Abstract: We develop a framework with worker heterogeneity, monopsony power, and putty-clay technology in order to study the distributional impact of the minimum wage in the short and long run.  We discipline our model to match the small employment effects of the minimum wage in the short run and the large estimated elasticities of substitution across different workers in the long run.  We find that in the short run, both small and large increases in the minimum wage have small impacts on employment and increase the labor income of the workers earning less than the new minimum. In the long run, the effects of the minimum wage greatly differ depending on the size of its increase: a small increase has a beneficial long-run impact on low-income workers in that it increases their employment, income, and welfare, whereas a large increase reduces the employment, income, and welfare of precisely the low-income workers it is meant to support. In either case, these long-run effects take time to fully materialize because firms slowly adjust their mix of inputs. Existing transfer programs, such as the earned-income tax credit (EITC) or a progressive tax system, are more effective than large increases in the minimum wage at improving long-run outcomes for workers at the low end of the wage distribution. But combining existing programs with a small increase in the minimum wage provides even larger welfare gains for those workers.