Information advantage and minimum wage

Abstract

In this study, I consider the effects of a minimum wage policy on an employment contract in the presence of asymmetric information. The key channel comprises how a minimum wage acts jointly with incentive compatibility (truthful revelation) given different levels of information advantage after signing the employment contract. This information advantage is captured by the timing of information arrival either before or after employment contracting. The minimum wage manipulates the rent-efficiency tradeoff with ex-ante information arrival, and it introduces a binding incentive compatibility with ex-post information arrival. I also discuss the implications of minimum wage legislation in terms of whether it might improve the efficiency of productivity, benefit low-skilled workers, and reduce inequality in society.