Seminarios

 

This paper incorporates a minimum wage in a search and matching model à la Diamond-Mortensen-Pissarides with private and public sectors and two types of workers, high and low skilled. The model is structurally estimated using recent data for Chile, a country with a large fraction of employment in the public sector and a well-known binding minimum wage (21 and 14% of the employment in the private and public sectors, respectively, earn the minimum wage). According to the estimation results, there is a sizable productivity gap in favor of the private sector. Counterfactual experiments show that an increase in the minimum wage has a large impact on the unemployment rate, with the low skilled workers being those who are more affected, and pushes the composition of the public-sector employment towards high skilled workers. Additionally, an increase in the target size of the public employment introduces a crowding out effect due to search frictions and generates a substitution effect between private and public sector employment and leaves unemployment almost unaffected. Finally, a reduction in the public sector hiring standards dissipates in part the search friction in the market, generating a fall in the unemployment rate and better composition of the pool of low skilled workers available for the private sector.