Minimum Wages and Relational Contracts

Matthias Fahn

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: The need to give incentives is usually absent in the literature on minimum wages. However, especially in the service sector it is important how well a job is done, and employees must be incentivized to perform accordingly. Furthermore, many aspects regarding service quality cannot be verified, which implies that relational contracts have to be used to provide incentives. The present article shows that in this case, a minimum wage increases implemented effort, i.e., realized service quality, as well as the efficiency of an employment relationship. Hence, this paper can explain why productivity and service quality went up after the introduction of the British National Minimum Wage, and that this might actually have caused a more efficient labor market. Furthermore, several empirically observed implications of a (higher) minimum wage can be explained. It might reduce turnover of employees, have spillover effects on higher wages, and reduce wage dispersion.

Keywords: Minimum Wages; Relational Contracts (search for similar items in EconPapers)
JEL-codes: C73 D21 J24 J31 (search for similar items in EconPapers)
Date: 2014-03
New Economics Papers: this item is included in nep-cta, nep-hrm and nep-lab
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Minimum Wages and Relational Contracts (2017)
Working Paper: Minimum Wages and Relational Contracts (2017)
Working Paper: Minimum Wages and Relational Contracts (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:20831

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