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A Minimum-Wage Model of Unemployment and Growth: The Case of a Backward-Bending Demand Curve for Labor

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Abstract

We add a minimum wage and hence involuntary unemployment to a conventional two-sector model of a perfectly competitive economy with optimal saving and endogenous growth. Our resulting model highlights the possible case of a backward-bending demand curve for labor, along which a hike in the minimum wage might increase total employment. This possibility provides theoretical support for some controversial empirical studies, which challenge the textbook prediction of an inverse relationship between employment and the minimum wage. Our model also implies that a minimum-wage hike has negative implications for both the growth rate and lifetime utility.

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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 14-05.

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Length: 24 pages
Date of creation: 03 Jul 2014
Date of revision:
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:14-05

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Keywords: Optimal growth; Minimum wage; Learning by doing; Involuntary unemployment;

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  1. Daron Acemoglu, 2009. "When Does Labor Scarcity Encourage Innovation?," NBER Working Papers 14809, National Bureau of Economic Research, Inc.
  2. Xavier Sala-i-Martin, 1995. "Transfers, social safety nets and economic growth," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 139, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Manning, Alan, 1995. "How Do We Know That Real Wages Are Too High?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(4), pages 1111-25, November.
  4. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, Elsevier, vol. 96(9-10), pages 739-749.
  5. Richard A. Brecher & Zhiqi Chen & Zhihao Yu, 2011. "The Trouble with Offshoring: Static and Dynamic Losses in the Presence of Unemployment," Carleton Economic Papers, Carleton University, Department of Economics 11-02, Carleton University, Department of Economics, revised Jan 2013.
  6. Cahuc, P. & Michel, P., 1992. "Minimum Wage, Unemployment and Growth," Papiers d'Economie Mathématique et Applications, Université Panthéon-Sorbonne (Paris 1) 92.35, Université Panthéon-Sorbonne (Paris 1).
  7. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
  8. Bagicha S. Minhas, 1962. "The Homohypallagic Production Function, Factor-Intensity Reversals, and the Heckscher-Ohlin Theorem," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 138.
  9. Brecher, Richard A., 1974. "Optimal commercial policy for a minimum-wage economy," Journal of International Economics, Elsevier, Elsevier, vol. 4(2), pages 139-149, May.
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