Minimum wages, wage dispersion and financial constraints in firms

Arabzadeh H, Balleer A, Gehrke B, Taskin AA (2024)

Publication Type: Journal article

Publication year: 2024

Journal

European Economic Review Elsevier

Book Volume: 163

Article Number: 104678

DOI: 10.1016/j.euroecorev.2024.104678

Abstract

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.

Involved external institutions

Rheinisch-Westfälische Technische Hochschule (RWTH) Aachen DE Germany (DE) Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI), Research divisions ‘Labor Markets, Education, Population’ and ‘Health Economics’ DE Germany (DE) Freie Universität Berlin DE Germany (DE)

How to cite

APA:

Arabzadeh, H., Balleer, A., Gehrke, B., & Taskin, A.A. (2024). Minimum wages, wage dispersion and financial constraints in firms. European Economic Review, 163. https://doi.org/10.1016/j.euroecorev.2024.104678

MLA:

Arabzadeh, Hamzeh, et al. "Minimum wages, wage dispersion and financial constraints in firms." European Economic Review 163 (2024).

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