The effect of minimum wages on employment in the presence of productivity fluctuations

Abstract: Traditionally, the impact of minimum wages on employment has been studied, and it is generally believed to have a negative effect. Yet, some recent studies have shown that the impact of minimum wages on employment can sometimes be positive. In addition, certain recent proposals set a higher minimum wage than the wage earned by some high-productivity workers. However, the impact of minimum wages on employment has been primarily studied on low-skilled workers, whereas there is limited research on high-skilled workers. To address this gap and examine the effects of minimum wages on high-productivity workers' employment, I construct a macroeconomic model incorporating productivity fluctuations, incomplete markets, directed search, and on-the-job search and compare the steady-state distributions between the baseline model and the model with a minimum wage. As a result, binding minimum wages increase the unemployment rate of both low and high-productivity workers.