Minimum Wage, Job Allocation, and Labor Market Efficiency

Using a simple matching model with differentiated skills, we will examine the effect of a minimum wage on the labor market. Introducing a minimum wage appears to improve the assignment of jobs to workers by making “bad” matches impossible. Three main results emerge from this. Firstly, a minimum wage increase may improve the efficiency of the labor market. Next, as soon as the minimum wage is increased, thereby constraining wage growth, unemployment benefits lose their positive effect on productivity, becoming invariably inefficient. Finally, numerical simulations show that introducing a minimum wage might be more efficient than increasing unemployment benefits.