Fairness and the Minimum Wage

Abstract

We propose a simple mechanism whereby, all else equal, consumers derive a higher marginal utility from consuming a good if it is produced at a sufficiently high wage cost. Combined with firms’ inability to credibly commit to higher wages, a mandated minimum wage policy can lead to higher output and increased profits simultaneously. The model can reconcile the limited effect of the minimum wage on employment with its positive effect on output prices which existing models fail to explain simultaneously. We seek to corroborate our findings with an online survey experiment that assesses the credibility of minimum wage policies, consumers’ responses to price changes, and their attitudes towards the minimum wage.