Minimum Wage Experiment

A minimum wage is introduced into an experimental labor market characterized by gift exchange. In the experiment, subjects are randomly divided into two groups, including manager group and employees group, with ten subjects in each group. In all periods each manager was matched anonymously with one employee no more than twice and never re-matched in two consecutive periods. In each period, the manager makes an individual wage offer to his matched employee and wage offers were written directly on employee record sheets so that only the manager and employee involved in the contract knew the wage offer. After receiving the wage, each employee chooses an effort level. Thus, both wage offers and effort levels were private information for the manager and worker in each pairing.
Participants were provided with calculators and were required to compute, correctly, the payoffs for both managers and employees.
The result from the first experiment shows that introducing a minimum wage into an ongoing labor market is a small insignificant negative effect on effort at low wages, and a larger significant positive effect at higher wages. However, in comparing a labor market that starts with a minimum wage versus one that does not, the minimum wage results in sharply reduced effort. This may be because workers act as if the minimum wage is effectively the zero wage (zero gift) reference point, while workers in the labor market with no minimum wage treat the zero wage as the zero gift reference point. The second experimental result, using payoff functions that make gift exchange more costly to both employers and employees, confirms that the effects of a minimum wage on effort within an ongoing labor market are unlikely to have a major adverse effect on employee
effort.