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Real Minimum Wage and Growth Theory: Simulations and Some Policy Results

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  • Manmohan Lal Agarwal
  • Bharat Hazari
  • Cheuk‐Yin Ho

Abstract

A Solow type two‐sector growth model is used to examine several issues related to growth and unemployment in a minimum wage economy. By simulating the model, we demonstrate that given the same percentage increase in wage rate, an economy with a higher capital–labor ratio is more likely to decay. More importantly, a tariff policy reduces the unemployment periods by 92% provided that the current capital–labor ratio is one‐sixth of that of the steady state capital–labor ratio. We assume that the first best policy of uniform wage subsidy is not politically feasible.

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  • Manmohan Lal Agarwal & Bharat Hazari & Cheuk‐Yin Ho, 2007. "Real Minimum Wage and Growth Theory: Simulations and Some Policy Results," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 10(3), pages 163-176.
    • Handle: RePEc:taf:jecprf:v:10:y:2007:i:3:p:163-176
    DOI: 10.1080/17487870701440598
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    1. H. Uzawa, 1971. "On a Two-Sector Model of Economic Growth," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 3, pages 19-26, Palgrave Macmillan.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    3. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 88(1), pages 98-116.
    4. R. M. Solow, 1971. "Note on Uzawa’s Two-Sector Model of Economic Growth," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 4, pages 27-30, Palgrave Macmillan.
    5. Sgro, Pasquale M & Takayama, Akira, 1981. "On the Long-Run Growth Effects of a Minimum Wage for a Two-Sector Economy," The Economic Record, The Economic Society of Australia, vol. 57(157), pages 180-185, June.
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