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Minimum Wages and Relational Contracts

Author

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  • Fahn, Matthias

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, which implies that relational contracts have to be used to provide incentives. The present article shows that in this case, a minimum wage increases implemented effort, i.e., realized service quality, as well as the efficiency of an employment relationship. Hence, this paper can explain 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, several empirically observed implications of a (higher) minimum wage can be explained. It might reduce turnover of employees, have spillover effects on higher wages, and reduce wage dispersion.

Suggested Citation

  • Fahn, Matthias, 2014. "Minimum Wages and Relational Contracts," Discussion Papers in Economics 20831, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:20831
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    File URL: https://epub.ub.uni-muenchen.de/20831/1/Fahn_2014.pdf
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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 & Marco A. Schwarz, 2016. "Long-Term Employment Relations when Agents are Present Biased," CESifo Working Paper Series 6159, CESifo.
    3. Florian Englmaier & Matthias Fahn & Ulrich Glogowski & Marco A. Schwarz, 2023. "When Protection Becomes Exploitation: The Impact of Firing Costs on Present-Biased Employees," Rationality and Competition Discussion Paper Series 480, CRC TRR 190 Rationality and Competition.
    4. 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.
    5. Matthias Fahn & Takeshi Murooka, 2022. "Informal Incentives and Labor Markets," CESifo Working Paper Series 9740, CESifo.
    6. 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.
    7. Fahn, Matthias & Murooka, Takeshi, 2024. "Informal Incentives and Labor Markets," IZA Discussion Papers 17042, Institute of Labor Economics (IZA).
    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. Peng-Ju Su, Alice, 2020. "Information advantage and minimum wage," Information Economics and Policy, Elsevier, vol. 50(C).
    10. Jonathan R. Peterson, 2023. "Employee bonding and turnover efficiency," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 32(1), pages 223-244, January.

    More about this item

    Keywords

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    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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