Most empirical studies on the minimum wage find a spike at the minimum wage, compression of wage differentials at a large interval above the minimum wage and small employment losses. This paper offers a search model which is consistent with these facts. We consider a continuum of worker and job types, Nash wage bargaining, and a production structure based on comparative advantages. The introduction of a minimum wage in this model makes some matches at the lower segments no longer profitable. In addition it leads to a redistribution of rents from firms to low skilled workers. A cluster of relatively simple vacancies, offering the minimum wage, is opened because the workers in this segment become relatively scarce. Finally, we give some numerical simulations to test for the validity of our approximations.

, , ,
Research Centre for Economic Policy (OCFEB)

Gautier, P., & Teulings, C. (2003). A large piece of a small pie: Minimum wages and unemployment benefits in an assignment model with search frictions. Retrieved from