Analyzing the Effects of Minimum Wages: A Microeconomic Approach

Abstract

We analyze the effects of minimum wages in a simple microeconomic model where several principals (potential employers) compete for one or several agents (workers) via their wage offers. A minimum wage changes this game by prohibiting wage offers below the imposed minimum wage, which results in interesting, novel effects. We show that minimum wages could harm agents even if these stay employed, while principals may benefit from minimum wages. Furthermore, a minimum wage may also influence the generated surplus when leaving employment unaffected, and destroy jobs that generate relatively high levels of surplus when affecting employment. We provide a full characterization of the effects and show that these hold for a variety of different bargaining procedures, as well as in the setting of stable outcomes.