DP3977 | Multiple Equilibria and Minimum Wages in Labour Markets with Informational Frictions and Heterogenous Production Technologies

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It is often argued that a mandatory minimum wage is binding only if the wage density displays a spike at it. In this Paper we analyse a model with search frictions and heterogeneous production technologies, in which imposition of a minimum wage affects wages even though, after imposition, the lowest wage in the market exceeds the minimum wage. The model has multiple equilibria as a result of the fact that the reservation wage of the unemployed and the lowest production technology in use affect each other. Imposition of a minimum wage may improve social welfare.