Minimum wages and youth unemployment

This paper constructs a labor search model to explore the effects of minimum wages on youth unemployment. To capture the gradual decline in unemployment for young workers as they age, the standard search model is extended so that workers gain experience when employed. Experienced workers have higher average productivity and lower job finding and separation rates that match wage and worker flow data. In this environment, minimum wages can have large effects on unemployment because they interact with a worker's ability to gain job experience. The increase in minimum wages between 2007 and 2009 can account for a 0.8 percentage point increase in the steady state unemployment rate and a 2.8 percentage point increase in unemployment for 15-24 year old workers in the model parameterized to simulate outcomes of high school educated workers. Minimum wages can also help explain the high rates of youth unemployment in France compared to the United States. (C) 2013 Elsevier B.V. All rights reserved.