Queen's Economics Department Working Paper No. 831
A model is constructed in which, given the inability of implicit contracts to be self-enforcing, a minimum wage policy combined with unemployment insurance can be welfare-improving. Unemployment insurance can be decentralized to the private sector if the government can commit to a minimum wage. However, if it cannot , a government which acts in the interest of the workers will have an incentive to increase the minimum wage to exploit private insurers. The full commitment optimum can be achieved by publicly provided unemployment insurance.