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The effects of a minimum wage increase in a model with multiple unemployment equilibria

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Julie Beugnot

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Abstract

We introduce the heterogeneity of labor in a simple imperfectly com- petitive aggregate labor market model "à la Manning (1990)" in order to analyze the effects of an exogenous rise of the legal minimum wage on the unemployment equilibrium, the wage dispersion and the general price level. We assume also the presence of "knowledge spillovers" in the in- dividual production function leading to increasing returns to scale at the aggregate level and involving the possibility of multiple equilibria. Then, thanks to a comparative statics exercise, we show that a rise in the legal minimum wage has no impact on the unemployment equilibria, increases the general price level proportionally to the share of low-skilled employ- ment in the total employment and reduces the wage dispersion. These results are broadly consistent with the Card Krueger's empirical findings (1995).

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Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 08-16.

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Length: 17 pages
Date of creation: Oct 2008
Date of revision: Oct 2008
Handle: RePEc:lam:wpaper:08-16

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  1. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September. [Downloadable!] (restricted)
  2. Rebitzer, James B. & Taylor, Lowell J., 1995. "The consequences of minimum wage laws Some new theoretical ideas," Journal of Public Economics, Elsevier, vol. 56(2), pages 245-255, February. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
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  4. Oswald, Andrew J, 1982. "The Microeconomic Theory of the Trade Union," Economic Journal, Royal Economic Society, vol. 92(367), pages 576-95, September. [Downloadable!] (restricted)
  5. Layard, Richard & Nickell, Stephen, 1986. "Unemployment in Britain," Economica, London School of Economics and Political Science, vol. 53(210(S)), pages S121-69, Supplemen. [Downloadable!] (restricted)
  6. Dickens, Richard & Machin, Stephen & Manning, Alan, 1999. "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 1-22, January. [Downloadable!] (restricted)
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  7. Cahuc, P. & Saint-Martin, A. & Zylberberg, A., 2001. "The consequences of the minimum wage when other wages are bargained over," European Economic Review, Elsevier, vol. 45(2), pages 337-352, February. [Downloadable!] (restricted)
  8. Manning, Alan, 1990. "Imperfect Competition, Multiple Equilibria and Unemployment Policy," Economic Journal, Royal Economic Society, vol. 100(400), pages 151-62, Supplemen. [Downloadable!] (restricted)
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