Spillover effects of minimum wagesin a two-sector search model

Labor market studies on the effects of minimum wages are typically confinedto the sector or worker group directly affected. We present a two-sector searchmodel in which one sector is more productive than the other one and thus,pays higher wages. In such a framework, setting a minimum wage in theunproductive sector to reduce the wage gap causes a negative spillover effecton the productive sector. While the effect on job creation in the (targeted) unproductivesector is ambiguous, job creation in the (non-targeted) productivesector unambiguously decreases. This is driven by the fact that a minimumwage increases the outside option of unemployed workers - contributing towage determination in the productive sector. Welfare effects are ambiguous.In principle, we cannot exclude that a minimum wage in a two-sector searchmodel is welfare enhancing due to the possibility of an above optimal levelof productive employment since firms do not take into account the effects oftheir individual job creation on aggregated search costs.[...] Christoph Moser, Nikolai Stähler