MINIMUM-WAGES AND THE INCENTIVES FOR SKILL FORMATION

We show that minimum wages may have beneficial effects on human capita l allocation in a situation when the marginal product of skilled labor is shared between firm and worker according to bargaining strength. F irms prefer more productive workers to less productive ones, and worke rs that do not match up to a certain productivity floor are not hired. A minimum wage increases the productivity requirement. To hang on to the primary sector, workers of intermediate talent are then induced to acquire more education, while there is a discouragement effect for wo rkers of lesser talent. A minimum wage can increase welfare even in ca ses where total education goes down. When the minimum wage is detrimen tal to welfare, the problem is typically that some workers acquire too much education in the first place.