Age-Differentiated Minimum Wage: An Exploratory Model

The fact that minimum wages seem specially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic two sector labor market model where workers with heterogeneous endowments of natural skills gain productivity through experience. We compare two equally binding schemes of single and age-differentiated minimum wages showing that even though with differentiated minimum wages a more equal distribution of income is achieved, such a scheme creates a more unequal distribution of wealth by forcing less skilled workers to remain in the uncovered sector for longer. We also show that relaxing minimum wage solely for young workers might be harmful for the less skilled ones. Suggestive evidence from Chile -where a differentiated minimum wage for workers under the age of 18 was introduced in 1989- lends support to the predictions of our model