Age-differentiated minimum wages in developing countries

The fact that minimum wages seem especially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic competitive two-sector labor market model where workerswith heterogeneous initial skills gain productivity through experience.We compare two equally binding schemes of single and age-differentiated minimumwages, and find that although differentiated minimumwages result in a more equal distribution of income, such a scheme creates a more unequal distribution of wealth by forcing less skilled workers to remain longer in the uncovered sector.We also show that relaxingminimumwage solely for young workers reduces youth unemployment but harms the less skilled ones. © 2006 Elsevier B.V. All rights reserved. JEL classification: D31; J31; J38; J42