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Combining minimum wage and exchange rate policy to release the external constraint on growth

Author

Listed:
  • N. Bauduin
  • N. Chusseau
  • J. Hellier

Abstract

In this article we analyse the combination of a minimum wage and a devaluation/depreciation so as to release the external constraint on growth. The policy maker aims at achieving both balanced trade and higher growth. These may be reached by devaluating the domestic currency, which however supports traditional industries characterized by high price elasticity and low income elasticity of demand. The release of the external constraint in the short term then yields a stronger constraint in the longer term. If traditional industries are unskilled and labour-intensive, the setting of a minimum wage distorts the specialization towards sectors with high demand growth. Devaluation/depreciation and minimum wage may thus be combined to release both the short term and longer term external constraint. We determine the condition for such a policy to be efficient. This combined policy must come with an educational policy that supports skill upgrading. It is typically tailored to 'advanced emerging countries' which aim at changing their specialization without slowing their growth.

Suggested Citation

  • N. Bauduin & N. Chusseau & J. Hellier, 2008. "Combining minimum wage and exchange rate policy to release the external constraint on growth," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(3), pages 299-320.
  • Handle: RePEc:taf:irapec:v:22:y:2008:i:3:p:299-320
    DOI: 10.1080/02692170802003475
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    References listed on IDEAS

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    1. Machin, Stephen & Manning, Alan, 1997. "Minimum wages and economic outcomes in Europe," European Economic Review, Elsevier, vol. 41(3-5), pages 733-742, April.
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    3. Nathalie Chusseau & Joël Hellier, 2007. "Impacts de l'ouverture Nord-Sud sur le progrès technique et les inégalités salariales," Revue économique, Presses de Sciences-Po, vol. 58(2), pages 455-479.
    4. Cahuc, Pierre & Michel, Philippe, 1996. "Minimum wage unemployment and growth," European Economic Review, Elsevier, vol. 40(7), pages 1463-1482, August.
    5. Alan Manning, 1995. "How Do We Know That Real Wages Are Too High?," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 1111-1125.
    6. Askenazy, Philippe, 2003. "Minimum wage, exports and growth," European Economic Review, Elsevier, vol. 47(1), pages 147-164, February.
    7. Flug, Karnit & Galor, Oded, 1986. "Minimum Wage in a General Equilibrium Model of International Trade and Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 149-164, February.
    8. Nicolas Bauduin & Joël Hellier, 2006. "Skill Dynamics, Inequality and Social Policies," Working Papers 34, ECINEQ, Society for the Study of Economic Inequality.
    9. Agell, Jonas & Lommerud, Kjell Erik, 1997. "Minimum wages and the incentives for skill formation," Journal of Public Economics, Elsevier, vol. 64(1), pages 25-40, April.
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