Working Paper: CEPR ID: DP3977
Authors: Gerard J. van den Berg
Abstract: It is often argued that a mandatory minimum wage is binding only if the wage density displays a spike at it. In this Paper we analyse a model with search frictions and heterogeneous production technologies, in which imposition of a minimum wage affects wages even though, after imposition, the lowest wage in the market exceeds the minimum wage. The model has multiple equilibria as a result of the fact that the reservation wage of the unemployed and the lowest production technology in use affect each other. Imposition of a minimum wage may improve social welfare.
Keywords: Congestion; Equilibrium; Imperfect Information; Job Search; Labour Market Policy; Matching; Productivity; Unemployment; Wages
JEL Codes: C72; D83; J30; J42; J60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| minimum wage (J38) | upward shift in wage distribution (J31) |
| upward shift in wage distribution (J31) | reduction in monopsony power (J42) |
| reduction in monopsony power (J42) | affect employment levels (J68) |
| minimum wage (J38) | transition from less favorable equilibrium to more favorable equilibrium (D59) |
| minimum wage (J38) | influence on shape of wage distribution (J31) |