We study the effect of a binding minimum wage on labor market outcomes, the accumulation of capital and welfare. We consider a large firm that invests in physical capital and hires several types of workers. Labor markets are characterized by search and matching frictions, while incomplete wage contracts allow workers to appropriate part of the return on each factor. Absent a minimum wage, the model in general gives rise to inefficient levels of capital and employment. We show that, when labor types are substitutes, the introduction of a binding minimum wage has positive effects on capital and positive and small effects on employment, and these effects depend on the ability of the minimum wage to deter rent appropriation by workers.
JEL codes: E24; J63; J68; L20.
Keywords: Capital; Search; Large firm; Hold up., Minimum wage; Employment