| Abstract: | We present a growth model that contains minimum wages as one important element of a flexicurity economy where we allow for heterogeneous labor and for real wage rigidities. We show that the wage‐setting process, in its reference to the reservation wage of the first labor market, is crucial as regards stability of the economy and persistent or explosive oscillations may occur, in particular when the influence of the reservation wage on wage formation in the first labor market becomes too strong. Further, minimum wages can alleviate the negative consequences of economic downturns and help stabilize the economy. |
