Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 0000-00-00
Number: 98-118/3
Author-Name: Coen N. Teulings
Author-Email: teulings@few.eur.nl
Author-Workplace-Name: University of Amsterdam
Title: Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox
Abstract: While the employment effects of minimum wages are usually reported to be small (suggesting low substitutability between skill types), direct estimates suggest a much larger degree of substitutability. This paper argues that this paradox is largely due to a bias induced by the aggregation of skill types into broad categories. An assignment model is applied where skilled workers have a comparative advantage in complex jobs. The implied pattern of substitutability reveals the sources of the bias. Estimation results for the United States show elasticities of complementarity to be underestimated by up to a factor 2.5. The methods laid out can likewise be applied to other markets where different quality types are close substitutes, like the housing market.
Keywords: aggregation bias; assignment models; substitutation; minimum wages
File-Url: https://papers.tinbergen.nl/98118.pdf
File-Format: application/pdf
File-Size: 287188 bytes
Handle: RePEc:tin:wpaper:19980118