Common wisdom holds that the introduction of a non-binding minimum wage is irrelevant for
actual wages and employment. Empirical and experimental research, however, has shown that
the introduction of a minimum wage can raise even those 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.
