Spillover Effects of Minimum Wages under Union Wage Bargaining

Empirical and experimental research suggests that minimum wages cause spill-overs to wages higher up in the wage distribution, i.e., they may even raise wages that were already above the new minimum wage. In this paper, we analyze how these findings can be explained by theoretical wage bargaining models between unions and firms. While the Nash bargaining solution is unaffected by minimum wages below initially bargained wages, we show that such minimum wages can drive up wages and be harmful to employment when bargaining follows the Kalai-Smorodinsky solution.