DP2319 The Endogenous Determination of Minimum Wage

Author(s): Gil S Epstein, Shmuel Nitzan
Publication Date: December 1999
Keyword(s): Endogenous Determination, Minimum Wage, Political Culture, Public Policy
JEL(s): J30, J38, J50
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2319

In this paper we study the endogenous determination of minimum wage employing a political-economic game-theoretic approach. A major objective of the paper is to clarify the crucial role of the strength of the workers' union and of political culture on the determination of the minimum wage. In general, the equilibrium minimum wage differs from that postulated in the literature. In our uncertain environment the optimal minimum wage from the workers' union point of view is lower than the level that maximizes its objective function in a certain environment where there is no opposition to the proposed minimum wage. We establish that a political culture that assigns a positive weight to the public wellbeing can give rise to a wage that equals or exceeds these levels.