By increasing the expected wage in low skill jobs, a minimum wage law can reduce the incentive for low skill workers to imitate high skill workers in the signaling process. The gain from reduced investment in the signal can more than offset the loss from unemployment among low skill workers so...

Efficiency wage models, in which firms find it profitable to pay wages above workers' reservation wages, provide a promising explanation for unemployment and interindustry wage differentials. One criticism of such models is that they imply firms should sell jobs by requiring up-front bonds from...