By combining features of rationing models
and hedonic models in a novel way, this paper
develops a structural model of categorical
labor force behavior to help explain several
puzzles in data on unemployment and discouraged
workers. It traces the links among minimum
wages or other rigidities, hiring and firing
decisions by firms, and labor force participa-
tion decisions by individuals of differing skill
levels. A key comparative static result is that
a rise in an effective minimum wage increases the
labor force participation of more skilled marginal
workers but reduces the participation of less
skilled marginal workers.