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The Endogenous Determination of Minimum Wage


  • Epstein, Gil S.

    () (Bar-Ilan University)

  • Nitzan, Shmuel

    () (Bar-Ilan University)


In this paper we study the endogenous determination of minimum wage employing a political-economic game-theoretic approach. A major objective of the paper is to clarify the crucial role of the strength of the workers’ union and of political culture on the determination of the minimum wage. In general, the equilibrium minimum wage differs from that postulated in the literature. In our uncertain environment the optimal minimum wage from the workers’ union point of view is lower than the level that maximizes its objective function in a certain environment where there is no opposition to the proposed minimum wage. We establish that a political culture that assigns a positive weight to the public well being can give rise to a wage that equals or exceeds these levels.

Suggested Citation

  • Epstein, Gil S. & Nitzan, Shmuel, 1999. "The Endogenous Determination of Minimum Wage," IZA Discussion Papers 73, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp73

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    References listed on IDEAS

    1. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-793, September.
    2. Saint-Paul, Gilles, 1998. "A framework for analyzing the political support for active labor market policy," Journal of Public Economics, Elsevier, vol. 67(2), pages 151-165, February.
    3. Magee,Stephen P. & Brock,William A. & Young,Leslie, 1989. "Black Hole Tariffs and Endogenous Policy Theory," Cambridge Books, Cambridge University Press, number 9780521377003, March.
    4. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-850, September.
    5. Van Long, Ngo & Vousden, Neil, 1991. "Protectionist responses and declining industries," Journal of International Economics, Elsevier, vol. 30(1-2), pages 87-103, February.
    6. Rodrik, Dani, 1986. "Tariffs, subsidies, and welfare with endogenous policy," Journal of International Economics, Elsevier, vol. 21(3-4), pages 285-299, November.
    7. Oren M. Levin-Waldman, 1998. "Exploring the Politics of the Minimum Wage," Macroeconomics 9805010, EconWPA.
    8. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, vol. 54(4), pages 923-942, July.
    9. Appelbaum, Elie & Katz, Eliakim, 1987. "Seeking Rents by Setting Rents: The Political Economy of Rent Seeking," Economic Journal, Royal Economic Society, vol. 97(387), pages 685-699, September.
    10. Rama, Martin, 1997. "Imperfect Rent Dissipation with Unionized Labor," Public Choice, Springer, vol. 93(1-2), pages 55-75, October.
    11. Rama, Martin & Tabellim, Guido, 1998. "Lobbying by capital and labor over trade and labor market policies," European Economic Review, Elsevier, vol. 42(7), pages 1295-1316, July.
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    Cited by:

    1. Maya Bacache-Beauvallet & Etienne Lehmann, 2008. "Minimum wage or negative income tax: why skilled workers may favor wage rigidities," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(1), pages 63-81, March.
    2. Epstein, Gil S. & Gang, Ira N., 2017. "Inequality, Good Governance and Endemic Corruption," GLO Discussion Paper Series 142, Global Labor Organization (GLO).
    3. Gil S. Epstein & Ira N. Gang, 2018. "Inequality, good governance and endemic corruption," WIDER Working Paper Series 019, World Institute for Development Economic Research (UNU-WIDER).

    More about this item


    Minimum wage; endogenous determination; political culture; public policy;

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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