The minimum wage in an adverse selection economy

Anthony A. Sampson

Oxford Economic Papers, 2002, vol. 54, issue 1, 150-159

Abstract: This paper examines the welfare implications of minimum wage legislation in a simple two-sector model, in which greater effort is required to produce in the higher productivity sector and individual ability is private. An adverse selection distortion arises so that, without a minimum wage, too many workers work in the primary sector because of the high wage based on average ability. These workers produce relatively little, while exerting effort. The paper shows that a minimum wage, in the low-productivity sector, can correct this distortion but may lower welfare. Copyright 2002, Oxford University Press.

Date: 2002
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