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Minimum Wages And Poverty

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  • Ravi Kanbur

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  • Gary Fields

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 labordemand, 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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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:169.

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Date of creation: Aug 2005
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Handle: RePEc:ess:wpaper:id:169

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Keywords: poverty; minimum wage; employment; unemployment; incomesharing;

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  1. Scott Adams & David Neumark, 2005. "The Effects of Living Wage Laws: Evidence from Failed and Derailed Living Wage Campaigns," NBER Working Papers 11342, National Bureau of Economic Research, Inc.
  2. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(4), pages S87-104, August.
  3. Lustig, N. & Mcleod, D., 1996. "Minimum Wages and Poverty in Developing Countries : Some Empirical Evidence," Papers, Brookings Institution - Working Papers 125, Brookings Institution - Working Papers.
  4. Stephan Klasen & Ingrid Woolard, 2001. "Surviving Unemployment without State Support: Unemployment and Household Formation in South Africa," CESifo Working Paper Series 533, CESifo Group Munich.
  5. David Neumark & William Wascher, 1997. "Do Minimum Wages Fight Poverty?," NBER Working Papers 6127, National Bureau of Economic Research, Inc.
  6. Fields, Gary S., 1997. "Wage floors and unemployment: A two-sector analysis," Labour Economics, Elsevier, Elsevier, vol. 4(1), pages 85-91, March.
  7. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(436), pages 639-49, May.
  8. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 761-66, May.
  9. Edward M. Gramlich, 1976. "Impact of Minimum Wages on Other Wages, Employment, and Family Incomes," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 409-462.
  10. Nora Lustig & Darryl McLeod, 1996. "Minimum Wages and Poverty in Developing Countries: Some Evidence," Discussion Papers, Brookings Institution International Economics 125, Brookings Institution International Economics.
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Cited by:
  1. Haroon Bhorat & Ravi Kanbur, 2005. "Poverty and Well-being in Post-Apartheid South Africa: An Overview of Data, Outcomes and Policy," Working Papers, University of Cape Town, Development Policy Research Unit 05101, University of Cape Town, Development Policy Research Unit.

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