Building upon a continuous-time model of search with Nash bargaining in a stationary
environment, we analyze the effect of changes in minimum wages on labor market outcomes
and welfare. While minimum wage increases invariably lead to employment losses in our
model, they may be welfare-improving to labor market participants using any one of a
number of welfare criteria. A key determinant of the welfare impact of a minimum wage
increase is the Nash bargaining power parameter. We discuss identification of this model
using Current Population Survey data on accepted wages and unemployment durations, and
demonstrate that key parameters are not identified when the distribution of match values
belongs to a location-scale family. By incorporating a limited amount of information from the
demand side of the market, we are able to obtain credible and precise estimates of all
primitive parameters, including bargaining power. Direct estimates of the welfare impact of
the minimum wage increase from $4.25 to $4.75 in 1996 provide limited evidence of a small
improvement. Using estimates of the primitive parameters we show that more substantial
welfare gains for labor market participants could have been obtained by doubling the
minimum wage rate in 1996, though at the cost of a perhaps unacceptably high
unemployment rate.
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