Minimum Wages and Unemployment Benefits in a Unionized Economy: 

A Game-Theoretic Approach

Marcus Dittrich

This paper aims at contributing to the labour market effects of minimum wages and unemployment benefits from a game-theoretic viewpoint. In a dual labour market model, the first sector outcome is characterised by bargaining between unions and firms, while in the second sector firms have to pay a statutory minimum wage. The model shows that the effects of minimum wages differ from those of unemployment benefits. Moreover, we show that the labour market outcome depends on the underlying game-theoretic bargaining solution. That is, the labour market effects of unemployment benefits and minimum wages in the Nash bargaining solution differ substantially from the effects if bargaining follows the Kalai-Smorodinsky solution.