Multiple Equilibria and Minimum Wages in Labor Markets with Informational Frictions and Heterogeneous Production Technologies

21 Pages Posted: 4 Jan 2004

See all articles by Gerard J. van den Berg

Gerard J. van den Berg

VU University Amsterdam - Department of Economics; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; Tinbergen Institute

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Abstract

It is often argued that a mandatory minimum wage is binding only if the wage density displays a spike at it. In this article, 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.

Suggested Citation

van den Berg, Gerard J., Multiple Equilibria and Minimum Wages in Labor Markets with Informational Frictions and Heterogeneous Production Technologies. International Economic Review, Vol. 44, pp. 1337-1357, November 2003. Available at SSRN: https://ssrn.com/abstract=452786

Gerard J. Van den Berg (Contact Author)

VU University Amsterdam - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Tinbergen Institute

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