The effect of minimum wages on employment in the presence of productivity fluctuations

TL;DR

This paper develops a macroeconomic model to analyze how minimum wages affect employment across different productivity levels, revealing that binding minimum wages increase unemployment for both low and high-productivity workers.

Contribution

It introduces a novel macroeconomic framework incorporating productivity fluctuations and search dynamics to study minimum wage effects on high-productivity workers.

Findings

Binding minimum wages increase unemployment for high-productivity workers.

Minimum wages can have complex effects depending on productivity levels.

The model highlights the importance of considering productivity fluctuations in policy analysis.

Abstract

Traditionally, the impact of minimum wages on employment has been studied, and it is generally believed to have a negative effect. Yet, some recent studies have shown that the impact of minimum wages on employment can sometimes be positive. In addition, certain recent proposals set a higher minimum wage than the wage earned by some high-productivity workers. However, the impact of minimum wages on employment has been primarily studied on low-skilled workers, whereas there is limited research on high-skilled workers. To address this gap and examine the effects of minimum wages on high-productivity workers' employment, I construct a macroeconomic model incorporating productivity fluctuations, incomplete markets, directed search, and on-the-job search and compare the steady-state distributions between the baseline model and the model with a minimum wage. As a result, binding minimum wages increase the unemployment rate of both low and high-productivity workers.