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Minimum wages and poverty with income-sharing

  • Gary Fields

    ()

  • Ravi Kanbur

    ()

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 three 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 income-sharing between employed and unemployed persons in society. Third, we extend the basic model to deal with income sharing within families. 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 income-sharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage. Copyright Springer Science+Business Media, Inc. 2007

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File URL: http://hdl.handle.net/10.1007/s10888-006-9037-5
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Article provided by Springer in its journal The Journal of Economic Inequality.

Volume (Year): 5 (2007)
Issue (Month): 2 (August)
Pages: 135-147

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Handle: RePEc:kap:jecinq:v:5:y:2007:i:2:p:135-147
Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=111137

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  1. David Neumark & William Wascher, 1997. "Do Minimum Wages Fight Poverty?," NBER Working Papers 6127, National Bureau of Economic Research, Inc.
  2. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  3. 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.
  4. 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.
  5. Stephan Klasen & Ingrid Woolard, 2009. "Surviving Unemployment Without State Support: Unemployment and Household Formation in South Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(1), pages 1-51, January.
  6. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August.
  7. Lustig, N. & Mcleod, D., 1996. "Minimum Wages and Poverty in Developing Countries : Some Empirical Evidence," Papers 125, Brookings Institution - Working Papers.
  8. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
  9. Fields, Gary S., 1997. "Wage floors and unemployment: A two-sector analysis," Labour Economics, Elsevier, vol. 4(1), pages 85-91, March.
  10. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December.
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