Does public sector employment buffer the minimum wage effects?

This paper studies the impact of a minimum wage policy in a labor market with a private and a public sector. We develop a two-sector search and matching model with minimum wage and heterogeneous workers in their human capital. We structurally estimate the model using data for Chile, a country with a large fraction of employment in the public sector and a binding minimum wage. Counterfactual analysis shows that institutional features of public sector employment reduce labor market frictions and mitigate the negative effect of the minimum wage on unemployment and welfare. (c) 2021 Elsevier Inc. All rights reserved.