Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282582 
Year of Publication: 
2023
Series/Report no.: 
IZA Discussion Papers No. 16455
Publisher: 
Institute of Labor Economics (IZA), Bonn
Abstract: 
This paper studies how minimum wages affect the wage distribution if firms face financial constraints. Using German employer-employee data and firm balance sheets, we document that the within-firm wage dispersion decreases more with higher minimum wages when firms are financially constrained. We introduce financial frictions into a search and matching labor market model with stochastic job matching, imperfect information, and endogenous effort. In line with the empirical literature, the model predicts that a higher minimum wage reduces hirings and separations. Firms become more selective such that their employment and wage dispersion fall. If effort increases strongly, firms may increase employment at the expense of higher wage dispersion. Financially constrained firms are more selective and reward effort less. As a result, within-firm wage dispersion and employment in these firms fall more with the minimum wage.
Subjects: 
minimum wage
wage dispersion
financial frictions
search and matching
unemployment
JEL: 
J31
J38
J63
J64
Document Type: 
Working Paper

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