Kiel Working Papers, Kiel Institute for World Economics
No 1298:
Minimum Wages and Firm Training
Wolfgang Lechthaler and Dennis J. Snower
Abstract: The paper analyzes the influence of minimum wages on
firms’ incentive to train their employees. We show that this influence
rests on two countervailing effects: minimum wages (i) augment wage
compression and thereby raise firms’ incentives to train and (ii) reduce
the profitability of employees, raise the firing rate and thereby reduce
training. Our analysis shows that the relative strength of these two
effects depends on the employees’ ability levels. Our striking result is
that minimum wages give rise to skills inequality: a rise in the minimum
wage leads to less training for low-ability workers and more training for
those of higher ability. In short, minimum wages create a "low-skill
trap."
Keywords: Minimum Wage, Firm Training, Skills Inequality; (follow links to similar papers)
JEL-Codes: J24,; J31; (follow links to similar papers)
21 pages, September 2006
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