Setting the minimum wage

The process leading to the setting of the minimum wage so far has been overlooked by economists. There are two common ways of setting national minimum wages: they are either government legislated or the byproduct of collective bargaining agreements, which are extended erga omnes to all workers. We develop a simple model relating the level of the minimum wage to the setting regime. Next, we exploit a new data set on minimum wages in 68 countries having a statutory national minimum level of pay in the period 1981–2005. We find that a Government legislated minimum wage is lower than a wage floor set within collective agreements. This effect survives to several robustness checks and can be interpreted as a causal effect of the setting regime on the level of the minimum wage.