Wage Floors and Unemployment: A Two-Sector Analysis

Abstract

This paper analyzes the effect of a wage floor on unemployment. Using a model with covered and noncovered sectors, comparative static analysis is performed with respect to the size of the wage floor, the elasticity of demand for labor in the covered sector, and the elasticity of the wage in the noncovered sector with respect to the size of the noncovered sector labor force. It turns out, contrary to the existing literature, that for none of these parameters is the comparative static effect unidirectional.