Minimum Wages and Relational Contracts

Matthias Fahn

No 5986, CESifo Working Paper Series from CESifo

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, it can be explained 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, if workers have low bargaining power, a higher minimum wage also increases firm profits and consequently employment. Therefore, the present article presents a new perspective on reasons for why minimum wages often have no or only negligible employment effects.

Keywords: minimum wages; relational contracts; bargaining (search for similar items in EconPapers)
JEL-codes: C73 D21 J24 J31 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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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)
Working Paper: Minimum Wages and Relational Contracts (2014)
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