THE PERVERSE EFFECTS OF WAGE AND PRICE CONTROLS IN SEARCH MARKETS

This paper examines the effects of price ceilings and minimum wages on the performance of markets in which agents must invest in costly search to become informed about prices or wages. In this context it is found that the market equilibrium may respond to changes in policy instruments in strikingly counterintuitive ways. In particular, the imposition of price ceilings and minimum wages may respectively result in consumer price increases and wage decreases. Thus an important implication of our analysis is that when unions fight to increase wages by raising the minimum wage, they may, paradoxically, actually be reducing the average wage of its members.