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A minimum‐wage model of unemployment and growth: The case of a backward‐bending demand curve for labor

Author

Listed:
  • Richard A. Brecher
  • Till Gross

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 theoretical possibility complements some controversial empirical studies, in challenging the standard 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.

Suggested Citation

  • Richard A. Brecher & Till Gross, 2019. "A minimum‐wage model of unemployment and growth: The case of a backward‐bending demand curve for labor," International Journal of Economic Theory, The International Society for Economic Theory, vol. 15(3), pages 297-309, September.
    • Handle: RePEc:bla:ijethy:v:15:y:2019:i:3:p:297-309
    DOI: 10.1111/ijet.12168
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    Cited by:

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    2. Richard A. Brecher & Till O. Gross, 2014. "Employment Gains from Minimum-Wage Hikes under Perfect Competition: A Simple General-Equilibrium Analysis," Carleton Economic Papers 14-14, Carleton University, Department of Economics.
    3. Sugata Marjit & Shrimoyee Ganguly & Rajat Acharyya, 2021. "Minimum wage, trade and unemployment in general equilibrium," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(1), pages 74-87, March.
    4. Richard A. Brecher & Till Gross, 2020. "Unemployment and income‐distribution effects of economic growth: A minimum‐wage analysis with optimal saving," International Journal of Economic Theory, The International Society for Economic Theory, vol. 16(3), pages 243-259, September.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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