952 X.Wang/Journal of Economic Psychology 33(2012)951-962 and then witha minimum wage policy imposed.In their context.faimess means.givenafirm's profit function.what is the ndced by theinmm age referenceven to levels hier tha theThe re thu pay wages han t or to their own fairnes ges ?While the earlier experiment by Falk et al.s ing tose torhctrownamcspreieienCeorCenaismftiepghRopholerToineheMoC iments are atributed mostly to the employersexpectation of the increase in wages (RWs)ther vage here means that the paid wage is lower than heard of the minimum wage policy.and69 workers said they did not know age actually was. Kie's(2010)survey in liangsu province reported th 7%migrant worker r the emplo comply wit s.The ext S3eofhemgantwoik supply of the migrant s studies on minim that rai in Flinn(2006).in the stand ard monopsony model,minimum wages can lead to higher wages and employment level.Fall ment in China and found that the ihich the degee of market p con ffec of minimum wage policy bo on wages and on vior Our stud ilar se and thes which we manipulate the kr eoNw欢 owledge the about the MW edict that wages tively related to level,and w We use a survey to the sub were higher in the INFORMED conditions and the high-level MW conditions.In the INFORMED treatment.more firms gave nt.more firms offered wages only at the minimum evel As stated earlier.firms'reactions to the minimum wage policy can be due to the concerns for fairness or for self-interest (Ariely.Loewenstein.Prelec.2003)es perception before the of the MW and the referenc s percept and then with a minimum wage policy imposed. In their context, fairness means, given a firm’s profit function, what is the appropriate offer a firm should give to a worker or the appropriate amount the worker is entitled to receive. When a min￾imum wage is introduced into the market, the workers’ reservation wages increase due to fairness concerns or the entitle￾ment effect induced by the minimum wage reference, even to levels higher than the minimum wage. The firms are thus forced to pay wages higher than the minimum wage. Much more research is worthwhile to extend the study of Falk et al. (2006) beyond the scope of their design. We examine two issues that, to our knowledge, have not caught the attention of the researchers, the effect of asymmetric knowledge about the minimum wage policy between the workers and firms, and the effects of different levels of minimum wages. The motivations of this study are two folds: one is to test whether the firms’ behavior in Falk et al. is due to self-interest or to their own fairness preferences; two is to apply the experiment to conditions that are more likely to be observed in a developing country. Will firms still offer wages higher than the minimum wage (MW) level if workers have no knowledge about the minimum wage policy? If a policy introduces a minimum wage lower than what many firms have already paid, will the firm reduce its wages? While the earlier experiment by Falk et al. suggests that firms increase wages due to expected fairness concern on the part of the workers, their experiment does not rule out the possibility that firms are behaving accord￾ing to self-interest, or their own fairness preference, or even altruism. If the positive spillover effect found in previous exper￾iments are attributed mostly to the employers’ expectation of the increase in workers’ reservation wages (RWs), then employers’ beneficial offers to workers will be less or nonexistent when workers are not aware of the minimum wage (MW). While lacking of the knowledge about the minimum wage policy on the part of workers and weak enforcement of the policy may exist in any country (see Ashenfelter & Smith, 1979; Strol & Frank, 2003, for examples), it is more likely to exist in the developing countries. In China, for example, since the scope of its minimum wage policy was broadened in 2004, some studies have shown that many low-income workers, especially migrant workers in China are not well informed about the minimum wage policy and are often not paid to the minimum wage level. Du and Pan (2009) compared the minimum wage coverage of the migrant workers and the local workers using urban labor data in 2001 and 2005. While all workers are legally covered by the minimum wage policy, not being covered by the minimum wage here means that the paid wage is lower than the minimum level due to non-compliance behavior. The percentage of workers whose hourly wage is above that year’s min￾imum wage is 47.8% vs. 78.5% respectively for the two groups in 2001 and 21.1% vs. 44.6% in 2005. This indicates a drop of minimum wage coverage over time for both groups with the rise of the minimum wage standards, with a bigger drop for the migrant workers. They also showed that the ratio of the minimum wage to the average had dropped, from 0.44 in 1995 to 0.28 by 2006. The survey of Han and Kong (2006) in Guangdong province showed that 52.7% (out of a sample of 1760) mi￾grant workers reported that they had never heard of the minimum wage policy, and 69.1% workers said they did not know what their minimum wage actually was. Xie’s (2010) survey in Jiangsu province reported that only 24.7% migrant workers knew their minimum wage standard. The lack of workers’ knowledge about the minimum wage policy may help explain the low coverage of the migrant work￾ers. It may have made it easier for the employers not to comply with the standards. The extensive supply of the migrant workers offers the employers with every opportunity for lowering labor standards including wages. The low minimum wage floor may have a negative impact on workers’ wages. More of the previous studies on minimum wage policy seem to have focused on the employment effect rather than its distributional effects (Adams & Neumark, 2005). While economic theory with complete competition predicts that raising mandated wage floors will lead to some employment reductions, as stated in Flinn (2006), in the standard monopsony model, minimum wages can lead to higher wages and employment level. Falk et al. (2006) also show that the impact of minimum wage on employment is ambiguous, depending on the magnitude of its impact on reservation wages. Empirically, Wang and Gunderson (2011) studied the impact of minimum wage on employ￾ment in China and found that the effects varied for different sectors in which the degree of market pressure varied – con￾sistent with the monopsonistic behavior. While we test the effects of minimum wage policy both on wages and on employment, our focus is more on the wage effects. The advantages of using the experimental method to study the behavioral effects of minimum wage policy have been illustrated out by a few studies (Charness & Kuhn, 2010; Falk & Fehr, 2003; Falk & Heckman, 2009). It is particularly helpful for our analysis of information asymmetry. Our study will use the similar setting and the same type of subject pool as Falk et al. (2006). We design an experiment in which we manipulate the knowledge of the employers and workers about the MW policy (the INFORM variable). Either both have common knowledge about the MW (INFORMED or INFORM = 1) or only the employers have knowledge about it (UNINFORMED or INFORM = 0). We derive hypotheses to predict that wages are posi￾tively related to the minimum wage level, and wages are lower under UNINFORMED conditions. We use a survey to the sub￾jects after the experiment to confirm our analyses. The results of our experiment are consistent with our hypotheses. Wages were higher in the INFORMED conditions and the high-level MW conditions. In the INFORMED treatment, more firms gave offers above the minimum level, but in the UNINFORMED treatment, more firms offered wages only at the minimum level, including many who used to offer wages higher than the minimum level. As stated earlier, firms’ reactions to the minimum wage policy can be due to the concerns for fairness or for self-interest. The introduction of minimum wage may serve as a reference point that shifts the fairness perceptions of firms even without the pressure of the workers. Previous work has proven the power of reference or anchoring effect of even arbitrary numbers (Ariely, Loewenstein, & Prelec, 2003). Firms’ initial fairness perception before the introduction of the MW and the reference point of the MW may imply the coexistence of multiple standards. When multiple standards of fairness exist, self-serving bias may drive the fairness perception of the agents (Babcock, Loewenstein, Issacharoff, & Camerer, 1995; Babcock, Loewen- 952 X. Wang / Journal of Economic Psychology 33 (2012) 951–962