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Jason Abrevaya, Chair 2225 Speedway, Stop C3100, Austin, TX 78712 • 512-471-3211

Jeroen Swinkels

Wed, October 28, 2009 • 3:30 PM - 5:00 PM • BRB 1.118

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Northwestern University, Kellogg School of Management

Minimum Wages and Performance Incentives

Theory

Abstract:

We consider the effect of an increase in the minimum wage in a market where workers may receive performance based pay on top of their minimum wage. We build a simple model in which firms can adjust not just the contract an individual worker faces when the minimum wage changes, but also the number of workers it employs. We show that while a firm with a fixed number of workers will typically reduce the amount of effort it chooses to induce in the face of an increase in the minimum wage, a firm that can also adjust its employment level will often instead increase effort. In the model studied, a minimum wage that is not too far above the market clearing wage has the effect of making all participants in the economy, including firms, consumers and both workers who keep their job and those who lose it worse off. Only when minimum wages are considerable is there any prospect that the workers who keep their jobs are better off (all other market participants remain worse off). Alternative means for improving worker well-being are analyzed in the context of the model


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