The Minimum Wage Spike in the Search Economy with Wage-Posting

Empirical wage and wage offer distributions exhibit substantial clustering in economies with a mandated minimum wage, the phenomenon knows as the minimum wage spike, as well as wage dispersion. Existing search-theoretic literature does not replicate both of the empirical phenomena simultaneously. This paper attempts to reconcile the two under assumptions of wage-posting, urn-ball matching and firm productive heterogeneity. A non-degenerate minimum wage spike and wage dispersion are obtained when firm wage determination embodies both incentives for collusion at the minimum wage and competition at the same time, making the spike and the dispersion the outcomes of partially collusive equilibrium. Besides this main result, the paper also shows that a higher minimum wage may reduce unemployment.