Minimum Wages and Relational Contracts

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThe need to give incentives is usually absent in the literature on minimum wages. However, especially in the service sector it is important how well a job is done, and employees must be incentivized to perform accordingly. Furthermore, many aspects regarding service quality cannot be veried, which implies that relational contracts have to be used to provide incentives. The present article shows that in this case, a minimum wage increases implemented eort, i.e., realized service quality, as well as the eciency of an employment relationship. Hence, this paper can explain why productivity and service quality went up after the introduction of the British National Minimum Wage, and that this might actually have caused a more ecient labor market. Furthermore, several empirically observed implications of a (higher) minimum wage can be explained. It might reduce turnover of employees, have spillover eects on higher wages, and reduce wage dispersion.

Informal Incentives and Labor Markets

“…Excellent surveys such as Belman and Wolfson (2014) or Schmitt (2015), as well as recent papers (Cengiz et al, 2019) state that there is no evidence for a systematic negative employment effect of a (moderate) binding minimum wage. Several forces that could counteract the resulting higher wage costs of an increased minimum wage have been identified, among them higher productivity of workers (Fahn, 2017;Coviello et al, 2022). We show that positive employment effects can be a side effect of reduced discrimination, in that it increases the costs of employing one group and decreases the costs of employing another group of workers, with the latter dominating.…”

“…Then, outcomes would rely on the exact specification of the bargaining process, whether disagreement payoffs are determined by separation or only by non-production (as in Hall and Milgrom, 2008), and to what extent renegotiation would happen. Here, we discuss one particular setting which is motivated by dynamic bargaining approaches such as Ramey and Watson (1997) or Fahn (2017). 17 Assume that, at the beginning of a period, firm and worker bargain about how the relationship surplus is shared.…”

“…He demonstrates that higher (exogenous) turnover costs reduce total wage payments and unemployment. Fahn (2017) assumes that firms and workers bargain about the terms of the employment relationship. Workers' incentives increase in their bargaining power, thus a minimum wage can increase effort and consequently the efficiency of employment relationships.…”

“…If the market frictions are large (i.e., the probability of finding a new worker α F is small), such exogenous turnover costs are enough for firms to honor their promises. If frictions are small so that α F > ᾱF , firms make use of another, endogenous, mechanism to make turnover costly by granting new workers a rent as in MacLeod and Malcomson (1998) or Fahn (2017); thus, firms do not utilize their wage-setting power to fully extract the relationship surplus. Therefore, new workers receive an upfront wage which is costly for firms because -different from payments made later on -the wage paid in the first period of a worker's employment cannot be used to provide incentives.…”

Relational retention

“…Hence, good outside options on the talented worker's side reduce the scope for inefficient retention. (2015) and Fahn (2017) show that a minimum wage can make relational contracts more productive (and increase welfare) by partially removing the firms' commitment problem. In our case, the minimum wage makes inefficient relational retention less likely.…”