Minimum Wages in an Equilibrium Search Model with Diminishing Returns to Labor in Production
JOURNAL OF LABOR ECONOMICS, Vol. 14, No. 2, April 1996
Posted: 13 Jun 1998
This article analyzes a minimum wage in a market with imperfect information and job search. It establishes that employment effects of a minimum wage do not generally indicate welfare effects. It shows that researchers interested in welfare consequences should ask two questions. First, is the existing minimum wage binding? Second, do some firms that would be bound by a new minimum wage presently experience labor shortages? If the answers to these questions are no and yes, respectively, this article supports the conclusion that a higher minimum wage is welfare improving, regardless of its effect on the unemployment rate.
JEL Classification: J64, J68, D83, J39
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