Wage Bargaining and Minimum Wages in a Search–Matching Model

Marcus Dittrich
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Marcus Dittrich: Faculty of Applied Economics, Deggendorf Institute of Technology, 94469 Deggendorf, Germany2CESifo, Munich, Germany

International Game Theory Review (IGTR), 2021, vol. 23, issue 04, 1-14

Abstract: In this paper, we analyze the introduction of a nonbinding minimum wage in a search–matching model with wage bargaining. Applying the Kalai–Smorodinsky bargaining solution instead of the commonly applied Nash solution, we provide a theoretical explanation for spillover effects of minimum wages on other wages higher up in the wage distribution. The labor market equilibrium in the Kalai–Smorodinsky solution with a minimum wage is characterized by lower market tightness, a higher unemployment rate, and lower vacancy rate than the equilibrium in the Nash solution. Moreover, we show that a nonbinding minimum wage can increase social welfare.

Keywords: Matching model; minimum wage; spillover effect; Kalai–Smorodinsky bargaining (search for similar items in EconPapers)
JEL-codes: C71 C78 J60 J68 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0219198922500049

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