Wage Bargaining and Minimum Wages in a Search–Matching Model

Abstract

In this paper, we analyze the introduction of a nonbinding minimum wage in a search–matching model with wage bargaining. Applying the Kalai–Smorodinsky bargaining solution instead of the commonly applied Nash solution, we provide a theoretical explanation for spillover effects of minimum wages on other wages higher up in the wage distribution. The labor market equilibrium in the Kalai–Smorodinsky solution with a minimum wage is characterized by lower market tightness, a higher unemployment rate, and lower vacancy rate than the equilibrium in the Nash solution. Moreover, we show that a nonbinding minimum wage can increase social welfare.