Abstract
This paper shows that increased factor mobility might cause the “race to the top” in minimum wage settings, contrary to what other studies have suggested. By focusing on geographical labor mobility, we propose a minimum wage competition model and show that minimum wage rates may increase after a significant increase in mobility because it allows each government to less internalize the negative effect of the minimum wage increase. This result is consistent with the data on European countries from the period of EU’s massive enlargement. We also show that minimum wage rates respond positively to increased geographical mobility when (1) mobile workers face significantly worse labor market conditions, (2) the concerns of economic efficiency are small, and (3) the share of mobile workers is relatively small. The model also yields a normative implication that coordination in setting minimum wages is needed to achieve a desirable outcome.
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