Minimum Wages, Wage Dispersion and Financial Constraints in Firms

Arbeitspapier

This paper studies how minimum wages affect the wage distribution if firms face financial constraints. Using German employer-employee data and firm balance sheets, we document that the within-firm wage dispersion decreases more with higher minimum wages when firms are financially constrained. We introduce financial frictions into a search and matching labor market model with stochastic job matching, imperfect information, and endogenous effort. In line with the empirical literature, the model predicts that a higher minimum wage reduces hirings and separations. Firms become more selective such that their employment and wage dispersion fall. If effort increases strongly, firms may increase employment at the expense of higher wage dispersion. Financially constrained firms are more selective and reward effort less. As a result, within-firm wage dispersion and employment in these firms fall more with the minimum wage.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 16455

Classification and Topics

• Classification: Wirtschaft ; Wage Level and Structure; Wage Differentials ; Wages, Compensation, and Labor Costs: Public Policy ; Labor Turnover; Vacancies; Layoffs ; Unemployment: Models, Duration, Incidence, and Job Search
• Subject: minimum wage ; wage dispersion ; financial frictions ; search and matching ; unemployment

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Arabzadeh, Hamzeh ; Balleer, Almut ; Gehrke, Britta ; Taskin, Ahmet Ali
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/282582
• Last update: 10.03.2025, 11:42 AM CET