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Wage and Employment Effects of Non-Binding Minimum Wages

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  • Marcus Dittrich
  • Andreas Knabe

Abstract

Common wisdom holds that the introduction of a non-binding minimum wage is irrelevant for actual wages and employment. Empirical and experimental research, however, has shown that the introduction of a minimum wage can raise even those wages that were already above the new minimum wage. In this paper, we analyze how these findings can be explained by theoretical wage bargaining models between unions and firms. While the Nash bargaining solution is unaffected by minimum wages below initially bargained wages, we show that such minimum wages can drive up wages – and be harmful to employment – when bargaining follows the Kalai-Smorodinsky solution.

Suggested Citation

  • Marcus Dittrich & Andreas Knabe, 2010. "Wage and Employment Effects of Non-Binding Minimum Wages," CESifo Working Paper Series 3149, CESifo.
  • Handle: RePEc:ces:ceswps:_3149
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    References listed on IDEAS

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    Cited by:

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    2. Marcus Dittrich & Andreas Knabe & Kristina Leipold, 2011. "Spillover Effects of Minimum Wages: Theory and Experimental Evidence," CESifo Working Paper Series 3576, CESifo.
    3. Fahn, Matthias, 2011. "Three Essays on Commitment and Information Problems," Munich Dissertations in Economics 13750, University of Munich, Department of Economics.
    4. Pia Rattenhuber, 2014. "Building the minimum wage: the distributional impact of Germany’s first sectoral minimum wage on wages and hours across different wage bargaining regimes," Empirical Economics, Springer, vol. 46(4), pages 1429-1446, June.

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    More about this item

    Keywords

    minimum wage; bargaining; Kalai-Smorodinsky solution;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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