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Minimum Wages and Relational Contracts

Author

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  • Matthias Fahn

Abstract

The need to give incentives is usually absent in the literature on minimum wages. However, especially in the service sector it is important how well a job is done, and employees must be incentivized to perform accordingly. Furthermore, many aspects regarding service quality cannot be verified and relational contracts have to be used to provide incentives. The present article shows that in this case, a minimum wage increases implemented effort, as well as the efficiency of an employment relationship. Hence, it can be explained why productivity and service quality went up after the introduction of the British National Minimum Wage, and that this might actually have caused a more efficient labor market. Furthermore, if workers have low bargaining power, a higher minimum wage also increases profits and consequently employment. Therefore, the present article presents a new perspective on reasons for why minimum wages often have no or only negligible negative employment effects (JEL C73, D21, J24, J31).

Suggested Citation

  • Matthias Fahn, 2017. "Minimum Wages and Relational Contracts," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(2), pages 301-331.
    • Handle: RePEc:oup:jleorg:v:33:y:2017:i:2:p:301-331.
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    File URL: http://hdl.handle.net/10.1093/jleo/eww018
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    Citations

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    Cited by:

    1. Daniel Herbold & Heiner Schumacher, 2020. "Relational retention," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(4), pages 490-502, June.
    2. Florian Englmaier & Matthias Fahn & Ulrich Glogowsky & Marco A. Schwarz, 2023. "When protection becomes exploitation: The impact of firing costs on present-biased employees," Economics working papers 2023-17, Department of Economics, Johannes Kepler University Linz, Austria.
    3. Matthias Fahn & Takeshi Murooka, 2021. "Informal Incentives, Labor Supply, and the Effect of Immigration on Wages," Economics working papers 2021-12, Department of Economics, Johannes Kepler University Linz, Austria.
    4. Fahn, Matthias & Murooka, Takeshi, 2024. "Informal Incentives and Labor Markets," IZA Discussion Papers 17042, Institute of Labor Economics (IZA).
    5. Florian Englmaier & Matthias Fahn & Marco A. Schwarz, 2016. "Long-Term Employment Relations when Agents are Present Biased," CESifo Working Paper Series 6159, CESifo.
    6. David A. Miller & Joel Watson, 2023. "An Active-Contracting Perspective on Equilibrium Selection in Relational Contracts," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 179(3-4), pages 530-561.
    7. Jonathan R. Peterson, 2023. "Employee bonding and turnover efficiency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(1), pages 223-244, January.
    8. Gresik, Thomas A. & Schindler, Dirk & Schjelderup, Guttorm, 2017. "Immobilizing corporate income shifting: Should it be safe to strip in the harbor?," Journal of Public Economics, Elsevier, vol. 152(C), pages 68-78.
    9. Matthias Fahn & Takeshi Murooka, 2022. "Informal Incentives and Labor Markets," Economics working papers 2022-05, Department of Economics, Johannes Kepler University Linz, Austria.
    10. Peng-Ju Su, Alice, 2020. "Information advantage and minimum wage," Information Economics and Policy, Elsevier, vol. 50(C).

    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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