Minimum wages, wage dispersion and financial constraints in firms

Hamzeh Arabzadeh, Almut Balleer, Britta Gehrke and Ahmet Ali Taskin

European Economic Review, 2024, vol. 163, issue C

Abstract: This paper studies how minimum wages affect the wage distribution if firms face financial constraints. Using German employer-employee data and firm balance sheets, we document that the within-firm wage dispersion decreases more with higher minimum wages when firms are financially constrained. We introduce financial frictions into a search and matching labor market model with stochastic job matching, imperfect information, and endogenous effort. In line with the empirical literature, the model predicts that a higher minimum wage reduces hirings and separations. Firms become more selective such that their employment and wage dispersion fall. If effort increases strongly, firms may increase employment at the expense of higher wage dispersion. Financially constrained firms are more selective and reward effort less. As a result, within-firm wage dispersion and employment in these firms fall more with the minimum wage.

Keywords: Minimum wage; Wage dispersion; Financial frictions; Search and matching; Unemployment (search for similar items in EconPapers)
JEL-codes: J31 J38 J63 J64 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Minimum Wages, Wage Dispersion and Financial Constraints in Firms (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:163:y:2024:i:c:s0014292124000072

DOI: 10.1016/j.euroecorev.2024.104678

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