Minimum wages and training Wolfgang Lechthaler a, ⁎ ,1 , Dennis J. Snower b,c,d,e a University St. Gallen and Kiel Institute for the World Economy, Germany b Kiel Institute for the World Economy, University Kiel, Germany c CEPR, London, UK d IZA, Germany e cesIFO, Germany Received 11 April 2006; received in revised form 19 July 2007; accepted 23 November 2007 Available online 3 December 2007 Abstract The paper analyzes the influence of minimum wages on firms' incentive to train their employees. We show that this influence rests on two countervailing effects: minimum wages (i) augment wage compression and thereby raise firms' incentives to train and (ii) reduce the profitability of employees, raise the firing rate and thereby reduce training. Our analysis shows that the relative strength of these two effects depends on the employees' ability levels. Our striking result is that minimum wages give rise to skills inequality: a rise in the minimum wage leads to less training for low-ability workers and more training for those of higher ability. In short, minimum wages create a ”low-skill trap.” We indicate that this effect may be important empirically. Finally, including workers' incentives to train themselves makes no major difference to our results. © 2007 Elsevier B.V. All rights reserved. JEL-Classification: J24; J31 Keywords: Minimum Wage; Firm Training; Skills Inequality 1. Introduction This paper explores the effect of minimum wages on firms' incentives to provide training for their employees. Our point of departure is a well-known paper by Acemoglu (1997), which argues that a more compressed structure of wages — such as is found in many European countries — gives firms more incentive to train. Acemoglu and Pischke (1999, 2003) view minimum wages as a source of wage compression and show that a rise in the minimum wage stimulates firm training. Labour Economics 15 (2008) 1223 – 1237 www.elsevier.com/locate/econbase ⁎ Corresponding author. 1 Financial support of the Swiss National Science Fund is gratefully acknowledged. 0927-5371/$ - see front matter © 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.labeco.2007.11.005