The Minimum Wage Puzzle and the Role of Social Preferences


A vast and growing number of studies suggests that minimum wages have limited disemployment effects while they can increase output prices. This finding contradicts the “law of demand” which states that demand should fall whenever prices increase, and so the scale of production and employment. We propose a simple mechanism whereby, all else equal, consumers derive a higher marginal utility from consuming a good if it is produced by workers with a higher wage provided the minimum wage relative to the markup is not too high. Combined with firms’ inability to credibly commit to higher wages, a mandated minimum wage policy could then lead to higher output and positive employment effects simultaneously. To test this mechanism, we run a survey in which we present individuals with different scenarios resulting in a price increase. We then ask individuals whether they consider the price increase to be fair or unfair and whether they are more or less willing to pay the higher price.