New experimental research by Jordi Brandts and Gary Charness finds
strong evidence that imposing a minimum wage lowers productivity at all
wages, and also decreases the likelihood that a high wage will be paid. This
result, published in the July 2004 Economic Journal, has important
implications for wage-setting policy, as it suggests that government
intervention may be literally counter-productive.
Brandts and Charness explore behaviour in experimental ‘gift-exchange’
markets in which firms make wage offers that are displayed to workers, who
have the opportunity of accepting them. Workers then choose the levels of
effort they will put into their work. Holding effort constant, higher wages yield
lower payoffs for firms and higher ones for workers; higher effort levels have
the opposite effects, holding wages constant.
The researchers consider the impact of competitive imbalance in the market,
by varying whether there is an excess supply of firms or an excess supply of
workers. They also impose a minimum wage in the market with an excess
supply of workers, and study the overall effect on wages and productivity.
The results exhibit a clear pattern of reciprocal actions, with effort provision
(productivity) increasing with higher wages but falling with a minimum wage.
The state of competitive imbalance does not have a major impact on
behaviour.
In the experiment, each firm and worker receives 10 units. Firms make wage
offers between 0 and 10; if an offer is accepted, the wage is subtracted from
the firm’s endowment and five times the wage is added to the worker’s
endowment. The worker then chooses effort between 0 and 10, with this effort
subtracted from the worker’s earnings and five times this effort added to the
firm’s earnings. With an excess supply of firms, there are 12 firms and 8
workers; with an excess supply of workers, there are 8 firms and 12 workers.
In the minimum-wage condition, there is an excess supply of workers and
wage offers are 5 or greater.
The standard prediction is that workers will choose the lowest possible effort
level; anticipating this, firms will offer the lowest possible wage. But these
researchers observe average wage offers between 7 and 8 in all
circumstances.
When there is no minimum wage, the ratio of aggregate effort to aggregate
wage is .527 with excess firms and .516 with excess workers. But effort
appears to be substantially lower when there is a minimum wage, with the
effort/wage ratio reduced by 35%, to .345. The urge to offer high wages is
eroded by the imposition of a minimum wage – a wage of 10 was offered 60%
of the time with excess firms and no minimum wage, but only 25% of the time
when a minimum wage was imposed.
The focus of this study is related to the more general theme that preferences
depend not only on the outcomes that follow from certain choices, but also on
information concerning the process leading to these outcomes. Information
pertaining to the process may matter because it offers inferences about the
intentions or disposition behind the actions of others.
In this experiment, behaviour is not greatly affected by market forces (the
state of competitive balance), but there are negative effects on labour
outcomes from imposing a minimum wage. Perhaps policy-makers should
take such results into account.
ENDS
Note for Editors: ‘Do Labour Market Conditions Affect Gift Exchange? Some
Experimental Evidence’ by Jordi Brandts and Gary Charness is published in
the July 2004 issue of the Economic Journal.
Brandts is at the Institut d'Anàlisi Econòmica (CSIC), Barcelona; Charness is
at the University of California Santa Barbera.
For Further Information: contact RES Media Consultant Romesh Vaitilingam
on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com);
Jordi Brandts on +34-93-580-6612 (email: Jordi.Brandts@uab.es); or Gary
Charness on +1-805-688-1408 (email: charness@econ.ucsb.edu).