Multiple Equilibria and Minimum Wages in Labor Markets with Informational Frictions and Heterogeneous Production Technologies
35 Pages Posted: 24 Jul 2003
Date Written: June 2003
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 analyze 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: Wages, Productivity, Job Search, Unemployment, Imperfect information, Equilibrium, labor Market Policy, Matching, Congestion
JEL Classification: J3, D83, J42, J6, C72
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