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In Discussion Paper No. 1212, Morten Ravn and Jan Sørensen consider the effects of minimum wage legislation in a three period, overlapping generations model with endogenous skill acquisition. The model also features an intergenerational externality in the accumulation of human capital since the production of human capital of every new generation depends positively on the average human capital stock of the preceding generation. This externality means that the competitive equilibrium allocation is sub-optimal, and every generation accumulates too little human capital, creating a case for minimum wages to compensate for this inefficiency. The authors show that in the case of identical agents, a binding minimum wage can increase human capital accumulation and welfare and the first-best allocation can be attained. When agents differ in their ability to produce human capital, a minimum wage may produce unemployment, and it may increase or decrease human capital accumulation depending on the level of the minimum wage and the ratio of workers who choose to go into unemployment to those who choose to acquire new skills. In general, a minimum wage will have two effects regardless of whether aggregate human capital decreases or increases: first, there will be a spike in the wage distribution at the minimum wage since all agents who are constrained and who qualify for the minimum required skills, will be working at this wage; and second, constrained individuals who cannot qualify for the minimum wage will abandon schooling and become unemployed. Minimum Wages: Curse or Blessing? Morten O Ravn and Jan Rose Sørensen Discussion Paper No. 1212, July 1995 (HR) |