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

  • Gerard J. van den Berg

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. Copyright 2003 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 4 (November)
Pages: 1337-1357

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:4:p:1337-1357
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