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The Minimum Wage Spike in the Search Economy with Wage-Posting

  • Natalya Y. Shelkova

    (Guilford College and University of Connecticut)

Empirical wage and wage offer distributions exhibit substantial clustering in economies with a mandated minimum wage, the phenomenon knows as the minimum wage spike, as well as wage dispersion. Existing search-theoretic literature does not replicate both of the empirical phenomena simultaneously. This paper attempts to reconcile the two under assumptions of wage-posting, urn-ball matching and firm productive heterogeneity. A non-degenerate minimum wage spike and wage dispersion are obtained when firm wage determination embodies both incentives for collusion at the minimum wage and competition at the same time, making the spike and the dispersion the outcomes of partially collusive equilibrium. Besides this main result, the paper also shows that a higher minimum wage may reduce unemployment.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2009-40.

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Length: 33 pages
Date of creation: Dec 2009
Date of revision:
Handle: RePEc:uct:uconnp:2009-40
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  1. Joel Shapiro, 2001. "Income taxation in a frictional labor market," Economics Working Papers 559, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Stephen A. Woodbury, 2009. "Unemployment," Book chapters authored by Upjohn Institute researchers, in: Kenneth G. Dau-Schmidt & Seth D. Harris & Orley Lobel (ed.), Labor and Employment Law and Economics, volume 2, pages 480-516 W.E. Upjohn Institute for Employment Research.
    • Stephen A. Woodbury, 2009. "Unemployment," Chapters, in: Labor and Employment Law and Economics, chapter 17 Edward Elgar.
  3. Fabien Postel-Vinay & Jean-Marc Robin, 2002. "The Distribution of Earnings in an Equilibrium Search Model with State-Dependent Offers and Counteroffers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 989-1016, November.
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  6. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
  7. Fernando Alvarez & Robert Shimer, 2008. "Search and Rest Unemployment," EIEF Working Papers Series 0809, Einaudi Institute for Economics and Finance (EIEF), revised Jan 2008.
  8. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 254-83, June.
  9. Richard V. Burkhauser & Kenneth A. Couch & David C. Wittenburg, 1996. "Who gets what from minimum wage hikes: A re-estimation of Card and Krueger's distributional analysis in "Myth and Measurement: The New Economics of the Minimum Wage."," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 49(3), pages 547-552, April.
  10. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA).
  11. Natalya Y. Shelkova, 2008. "Low-wage labor markets amd the power of suggestion," Working Papers 1112, Princeton University, Department of Economics, Industrial Relations Section..
  12. Stephen Machin & Alan Manning & Lupin Rahman, 2003. "Where the Minimum Wage Bites Hard: Introduction of Minimum Wages to a Low Wage Sector," Journal of the European Economic Association, MIT Press, vol. 1(1), pages 154-180, 03.
  13. Alain Delacroix & Shouyong Shi, 2003. "Directed Search On the Job and the Wage Ladder," Working Papers shouyong-03-04, University of Toronto, Department of Economics.
  14. Stephane Pallage & Christian Zimmermann, 1997. "Moral Hazard and Optimal Unemployment Insurance in an Economy with Heterogeneous Skills," Cahiers de recherche CREFE / CREFE Working Papers 54, CREFE, Université du Québec à Montréal.
  15. Brown, Charles, 1999. "Minimum wages, employment, and the distribution of income," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 32, pages 2101-2163 Elsevier.
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