Minimum wage spillover effects and social welfare in a model of stochastic job matching

Abstract

In this paper, I carry out a welfare analysis of the minimum wage in the framework of a Diamond-Mortensen-Pissarides model with stochastic job matching. Iexploretheroleoftheminimumwageinalabormarket with trading externalities and present the necessary and sufficient condition for a minimum wage hike to be efficiency enhancing. In this context, I characterize minimum wage spillover effects and demonstrate that there is a direct link between the welfare effects and spillover effects of a minimum wage. This theoretical finding suggests that the welfare impact of minimum wage changes can be inferred from the empirical observation of spillover effects on the wage distribution. | INTRODUCTIONRecent empirical studies have challenged the predictions of the simple textbook model about the effects of the minimum wage on labor market outcomes: following the influential work of Card and Krueger (1995), a large body of empirical work has documented that moderate increases in the level of the wage floor decrease wage inequality and have little or no adverse effect on employment (e.g., see Cengiz et al., 2019 for the USA, Butcher et al., 2012 for the UK, and Dustmann et al., 2021 for Germany). 1 Although this evidence is suggestive of an overall positive effect of the minimum wage on the welfare of labor market participants, the evaluation