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WORKING PAPERS / 16 February 2022

What is the optimal minimum wage?

Yujiang River Chen and Coen N Teulings

Centre for Economic Policy Research CEPR, Discussion Paper Series 10 February 2022


The extensive literature on minimum wages has found evidence for the compression of relative
wages and mixed results for employment. This literature has been plagued by a number of
problems. First, the median-minimum wage ratio is used as the independent variable, where the
median is endogenous. Second, it is difficult to disentangle compression of relative wages and
truncation due to employment effects. Third, all effects are likely to depend on the initial level of the
minimum. Fourth, employment effects are likely to differ between worker types. We offer solutions
for these problems, by using instruments for the median, by using data on personal characteristics,
and by using a flexible specification. We apply our method to US data starting from 1979, allowing
for a wide variation in minimum wages. We find strong compression and positive employment
effects for the lower half of the distribution, persisting for quite high levels of the minimum.

Keywords: Minimum Wages, US, employment effects, wage dispersion, Wage Share