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Minimum Wages and Poverty

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  • Fields, Gary S.
  • Kanbur, Ravi
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    Abstract

    Textbook analysis tells us that in a competitive labor market, the introduction of a minimum wage above the competitive equilibrium wage will cause unemployment. This paper makes two contributions to the basic theory of the minimum wage. First, we analyze the effects of a higher minimum wage in terms of poverty rather than in terms of unemployment. Second, we extend the standard textbook model to allow for incomesharing between the employed and the unemployed. We find that there are situations in which a higher minimum wage raises poverty, others where it reduces poverty, and yet others in which poverty is unchanged. We characterize precisely how the poverty effect depends on four parameters: the degree of poverty aversion, the elasticity of labor demand, the ratio of the minimum wage to the poverty line, and the extent of incomesharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage.

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    File URL: http://purl.umn.edu/127086
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    Bibliographic Info

    Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127086.

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    Date of creation: 2005
    Date of revision:
    Handle: RePEc:ags:cudawp:127086

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    Related research

    Keywords: Minimum wage; poverty; unemployment; Food Security and Poverty; Labor and Human Capital; D6; I32; J3; J64;

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    References

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    1. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
    2. Klasen, Stephan & Woolard, Ingrid, 2000. "Surviving Unemployment without State Support: Unemployment and Household Formation in South Africa," IZA Discussion Papers 237, Institute for the Study of Labor (IZA).
    3. Adams, Scott & Neumark, David, 2005. "The Effects of Living Wage Laws: Evidence from Failed and Derailed Living Wage Campaigns," IZA Discussion Papers 1566, Institute for the Study of Labor (IZA).
    4. Nora Lustig & Darryl McLeod, 1996. "Minimum Wages and Poverty in Developing Countries: Some Evidence," Discussion Papers 125, Brookings Institution International Economics.
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    Cited by:
    1. Bhorat, Haroon & Kanbur, Ravi, 2006. "Poverty and Well-being in Post-Apartheid South Africa: An Overview of Data, Outcomes and Policy," Working Papers 127035, Cornell University, Department of Applied Economics and Management.

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