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Combining minimum wage and exchange rate policy to release the external constraint on growth

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  • N. Bauduin
  • N. Chusseau
  • J. Hellier

Abstract

In this article we analyse the combination of a minimum wage and a devaluation/depreciation so as to release the external constraint on growth. The policy maker aims at achieving both balanced trade and higher growth. These may be reached by devaluating the domestic currency, which however supports traditional industries characterized by high price elasticity and low income elasticity of demand. The release of the external constraint in the short term then yields a stronger constraint in the longer term. If traditional industries are unskilled and labour-intensive, the setting of a minimum wage distorts the specialization towards sectors with high demand growth. Devaluation/depreciation and minimum wage may thus be combined to release both the short term and longer term external constraint. We determine the condition for such a policy to be efficient. This combined policy must come with an educational policy that supports skill upgrading. It is typically tailored to 'advanced emerging countries' which aim at changing their specialization without slowing their growth.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/02692170802003475
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 22 (2008)
Issue (Month): 3 ()
Pages: 299-320

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Handle: RePEc:taf:irapec:v:22:y:2008:i:3:p:299-320

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Related research

Keywords: devaluation; external constraint; growth; minimum wage;

References

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  1. Askenazy, Philippe, 2003. "Minimum wage, exports and growth," European Economic Review, Elsevier, vol. 47(1), pages 147-164, February.
  2. Nathalie Chusseau & Joël Hellier, 2007. "Impacts de l'ouverture Nord-Sud sur le progrès technique et les inégalités salariales," Revue économique, Presses de Sciences-Po, vol. 58(2), pages 455-479.
  3. Anthony Philip Thirlwall, 1979. "The Balance of Payments Constraint as an Explanation of International Growth Rate Differences," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 32(128), pages 45-53.
  4. Cahuc, P. & Michel, P., 1992. "Minimum Wage, Unemployment and Growth," Papiers d'Economie Mathématique et Applications 92.35, Université Panthéon-Sorbonne (Paris 1).
  5. Machin, Stephen & Manning, Alan, 1997. "Minimum wages and economic outcomes in Europe," European Economic Review, Elsevier, vol. 41(3-5), pages 733-742, April.
  6. Nicolas Bauduin & Joël Hellier, 2006. "Skill Dynamics, Inequality and Social Policies," Working Papers 34, ECINEQ, Society for the Study of Economic Inequality.
  7. Manning, Alan, 1995. "How Do We Know That Real Wages Are Too High?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1111-25, November.
  8. Agell, Jonas & Lommerud, Kjell Erik, 1997. "Minimum wages and the incentives for skill formation," Journal of Public Economics, Elsevier, vol. 64(1), pages 25-40, April.
  9. Flug, Karnit & Galor, Oded, 1986. "Minimum Wage in a General Equilibrium Model of International Trade and Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 149-64, February.
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