The Effects of a Minimum Wage on the Labor Market: A Complex Perspective - Working Paper

June, 2004

In this working paper, Potter and Marroquin adopt a different approach to understand a labor market. They built a competitive labor market from the bottom-up; it is composed by four kinds of employees and four kinds of employers. In the simulation, employees and employers act to reach a minimum level of satisfaction (on the lines of Simon, 1947; and Axtell and Epstein, 1996), which means that they don’t follow a utility maximizing behavior. With a few basic rules Potter and Marroquin were able to determine the effect of a minimum wage on unemployment rates, total wages, and average wages in the different populations. Their labor market is dynamic; and therefore significantly different than the standard supply and demand approach. The model can also operate under both, competitive and monopsony assumptions. Another advantage of the model is that it is possible to make changes on the parameters and evaluate the effect on the independent variables. The authors' results conform the theoretical agreements and offers evidence for increasing minimum wage elasticity, especially in the case of subjects defined as immigrants and teenagers. In the monopsony case the results also resemble those predicted by the theory, however the authors found that at high levels of the minimum wage, the wages for the total economy decrease, the effects for each group, however are not clear and show a complex pattern.