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

Listed author(s):
  • van den Berg, Gerard J.

    ()

    (University of Bristol)

It is often argued that a mandatory minimum wage is binding only if the wage density displays a spike at it. In this paper 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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 806.

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Length: 35 pages
Date of creation: Jun 2003
Publication status: published in: International Economic Review, 2003, 44 (4), 1337-1357
Handle: RePEc:iza:izadps:dp806
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