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Multiple equilibria and minimum wages in labor markets with informational frictions and heterogeneous production technologies

Research output: Contribution to journalArticle

Original languageEnglish
Pages (from-to)1337-1357
Number of pages21
JournalInternational Economic Review
Volume44
Issue number4
DOIs
DatePublished - Nov 2003

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.

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