Spillover Effects of Minimum Wages in a Two-Sector Search Model

48 Pages Posted: 8 Jun 2016

See all articles by Christoph Moser

Christoph Moser

ETH Zürich - KOF Swiss Economic Institute

Nikolai Stahler

Deutsche Bundesbank - Economics Department

Date Written: 2009

Abstract

Labor market studies on the effects of minimum wages are typically confined to the sector or worker group directly affected. We present a two-sector search model in which one sector is more productive than the other one and thus, pays higher wages. In such a framework, setting a minimum wage in the unproductive sector to reduce the wage gap causes a negative spillover effect on the productive sector. While the effect on job creation in the (targeted) unproductive sector is ambiguous, job creation in the (non-targeted) productive sector unambiguously decreases. This is driven by the fact that a minimum wage increases the outside option of unemployed workers - contributing to wage determination in the productive sector. Welfare effects are ambiguous. In principle, we cannot exclude that a minimum wage in a two-sector search model is welfare enhancing due to the possibility of an above optimal level of productive employment since firms do not take into account the effects of their individual job creation on aggregated search costs.

Keywords: minimum wages, matching models, two sectors, unemployment, welfare

JEL Classification: E24, J31, J64, J60

Suggested Citation

Moser, Christoph and Stahler, Nikolai, Spillover Effects of Minimum Wages in a Two-Sector Search Model (2009). Bundesbank Series 1 Discussion Paper No. 2009,01, Available at SSRN: https://ssrn.com/abstract=2785330 or http://dx.doi.org/10.2139/ssrn.2785330

Christoph Moser (Contact Author)

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Nikolai Stahler

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
117
Abstract Views
710
Rank
427,869
PlumX Metrics