Wage and Employment Effects of Non-Binding Minimum Wages

28 Pages Posted: 11 Aug 2010

See all articles by Marcus Dittrich

Marcus Dittrich

Deggendorf Institute of Technology; CESifo (Center for Economic Studies and Ifo Institute)

Andreas Knabe

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 11, 2010

Abstract

Common wisdom holds that the introduction of a non-binding minimum wage is irrelevant for actual wages and employment. Empirical and experimental research, however, has shown that the introduction of a minimum wage can raise even those wages that were already above the new minimum wage. In this paper, we analyze how these findings can be explained by theoretical wage bargaining models between unions and firms. While the Nash bargaining solution is unaffected by minimum wages below initially bargained wages, we show that such minimum wages can drive up wages – and be harmful to employment – when bargaining follows the Kalai-Smorodinsky solution.

Keywords: minimum wage, bargaining, Kalai-Smorodinsky solution

JEL Classification: J38, C78, J52

Suggested Citation

Dittrich, Marcus and Knabe, Andreas, Wage and Employment Effects of Non-Binding Minimum Wages (August 11, 2010). CESifo Working Paper Series No. 3149. Available at SSRN: https://ssrn.com/abstract=1656804

Marcus Dittrich (Contact Author)

Deggendorf Institute of Technology ( email )

Edlmairstraße 6 und 8
Deggendorf, Bavaria 94469
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Andreas Knabe

Otto-von-Guericke-Universität Magdeburg - Institute of Economics and Business Administration ( email )

Universitaetsplatz 2
Magdeburg, 39016
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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