The effects of a minimum wage increase in a model with multiple unemployment equilibria

We introduce the heterogeneity of labor in a simple imperfectly com- petitive aggregate labor market model "à la Manning (1990)" in order to analyze the effects of an exogenous rise of the legal minimum wage on the unemployment equilibrium, the wage dispersion and the general price level. We assume also the presence of "knowledge spillovers" in the in- dividual production function leading to increasing returns to scale at the aggregate level and involving the possibility of multiple equilibria. Then, thanks to a comparative statics exercise, we show that a rise in the legal minimum wage has no impact on the unemployment equilibria, increases the general price level proportionally to the share of low-skilled employ- ment in the total employment and reduces the wage dispersion. These results are broadly consistent with the Card Krueger's empirical findings (1995).