A Cross-Country Comparison of the Minimum Wage
This paper compares the minimum wage in different countries and evaluates its effectiveness by using a calibrated equilibrium labor search model. The main result is that the conclusions from comparisons and tests, which are based on empirical grounds, are sometimes reversed when examined within the model. I show, that under reasonable assumptions, the minimum wage in the U.S., which is low, and therefore perceived to be ineffective, is in fact more effective than the one in some European countries. The minimum wage in the U.S. is above the reservation wage of low-skilled workers, yet, it is substantially lower than labor productivity; I find that adopting the recent proposal to raise the Federal minimum wage by 40 percent will reduce the monopsonistic power of firms without having an adverse effect on employment of low-skilled workers.