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Minimum Wages and Firm Training

Author

Listed:
  • Wolfgang Lechthaler
  • Dennis J. Snower

Abstract

The paper analyzes the influence of minimum wages on firms’ incentive to train their employees. We show that this influence rests on two countervailing effects: minimum wages (i) augment wage compression and thereby raise firms’ incentives to train and (ii) reduce the profitability of employees, raise the firing rate and thereby reduce training. Our analysis shows that the relative strength of these two effects depends on the employees’ ability levels. Our striking result is that minimum wages give rise to skills inequality: a rise in the minimum wage leads to less training for low-ability workers and more training for those of higher ability. In short, minimum wages create a "low-skill trap."

Suggested Citation

  • Wolfgang Lechthaler & Dennis J. Snower, 2006. "Minimum Wages and Firm Training," Kiel Working Papers 1298, Kiel Institute for the World Economy.
  • Handle: RePEc:kie:kieliw:1298
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    More about this item

    Keywords

    Minimum Wage; Firm Training; Skills Inequality;
    All these keywords.

    JEL classification:

    • 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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