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Can a Non-Binding Minimum Wage Reduce Wages and Employment?

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  • Sofia Bauducco
  • Alexandre Janiak

Abstract

We show that, in the large-firm search model (e.g. Cahuc et al. (2008)), a minimum wage may reduce employment even when the level of the introduced minimum wage lies below the equilibrium wage of the laisser-faire economy. The argument is based on multiple equilibria and the idea that, in a large-firm context, the representative firm may choose to overemploy workers in order to renegotiate lower wages.

Suggested Citation

  • Sofia Bauducco & Alexandre Janiak, 2015. "Can a Non-Binding Minimum Wage Reduce Wages and Employment?," Working Papers Central Bank of Chile 756, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:756
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_756.pdf
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    References listed on IDEAS

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    1. Cahuc, Pierre & Wasmer, Etienne, 2001. "Does Intrafirm Bargaining Matter In The Large Firm'S Matching Model?," Macroeconomic Dynamics, Cambridge University Press, vol. 5(5), pages 742-747, November.
    2. Sofia Bauducco & Alexandre Janiak, 2015. "The Impact of the Minimum Wage on Capital Accumulation and Employment in a Large-Firm Framework," Working Papers Central Bank of Chile 755, Central Bank of Chile.
    3. Dirk Krueger & Fabrizio Perri & Luigi Pistaferri & Giovanni L. Violante, 2010. "Cross Sectional Facts for Macroeconomists," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 1-14, January.
    4. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
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    1. Bauducco, Sofía & Janiak, Alexandre, 2018. "The macroeconomic consequences of raising the minimum wage: Capital accumulation, employment and the wage distribution," European Economic Review, Elsevier, vol. 101(C), pages 57-76.

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