published in: International Economic Review, 2003, 44 (4), 1337-1357
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 analyze 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.
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