Spillover Effects of Minimum Wages: Theory and Experimental Evidence

27 Pages Posted: 21 Sep 2011

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)

Kristina Leipold

Dresden University of Technology

Date Written: September 21, 2011

Abstract

We study the spillover effects of minimum wages in a laboratory experiment. In a bilateral firm-worker bargaining setting, we find that the introduction of a minimum wage exerts upward pressure on wages even if the minimum wage is too low to be a binding restriction. Furthermore, raising the minimum wage to a binding level increases the bargained wage above the new minimum wage level. While the Nash solution cannot explain the existence of spillover effects, the Kalai-Smorodinsky solution yields results that are qualitatively more in line with our experimental findings.

Keywords: minimum wage, bargaining, Kalai-Smorodinsky solution, labor market experiments

JEL Classification: C710, C910, J380

Suggested Citation

Dittrich, Marcus and Knabe, Andreas and Leipold, Kristina, Spillover Effects of Minimum Wages: Theory and Experimental Evidence (September 21, 2011). CESifo Working Paper Series No. 3576. Available at SSRN: https://ssrn.com/abstract=1931493

Marcus Dittrich

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 (Contact Author)

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

Kristina Leipold

Dresden University of Technology ( email )

Faculty of Economics and Business Administration
Dresden, 01062
Germany

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