Optimal Design and Quantitative Evaluation of the Minimum Wage

Abstract

We study a labor market where firms have private information about their ex-ante heterogeneous productivities and search is random. In this environment, a binding minimum wage can be efficiency-enhancing-we show that setting it using a version of the Vickery-Clarke-Groves mechanism delivers full efficiency. In a dynamic, stochastic version of the model calibrated to the Routine Manual labor market in the U.S., our proposed mechanism generates sizeable welfare gains. The resulting minimum wage is procyclical, dampening the response of unemployment to aggregate shocks.