Age-Differentiated Minimum Wages in a Dual Labor Market Model

The fact that minimum wages seem especially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic competitive two-sector labor market model where workers with heterogeneous initial skills gain productivity through experience. We compare two equally binding schemes of single and age-differentiated minimum wages, and find that although differentiated minimum wages result in a more equal distribution of income, such a scheme creates a more unequal distribution of wealth, by forcing less skilled workers to remain longer in the uncovered sector. We also show that relaxing minimum wage solely for young workers may be harmful for less skilled ones.