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Real Minimum Wage and Growth Theory: Simulations and Some Policy Results


  • Manmohan Lal Agarwal
  • Bharat Hazari
  • Cheuk-Yin Ho


A Solow type two-sector growth model is used to examine several issues related to growth and unemployment in a minimum wage economy. By simulating the model, we demonstrate that given the same percentage increase in wage rate, an economy with a higher capital-labor ratio is more likely to decay. More importantly, a tariff policy reduces the unemployment periods by 92% provided that the current capital-labor ratio is one-sixth of that of the steady state capital-labor ratio. We assume that the first best policy of uniform wage subsidy is not politically feasible.

Suggested Citation

  • Manmohan Lal Agarwal & Bharat Hazari & Cheuk-Yin Ho, 2007. "Real Minimum Wage and Growth Theory: Simulations and Some Policy Results," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 10(3), pages 163-176.
  • Handle: RePEc:taf:jecprf:v:10:y:2007:i:3:p:163-176
    DOI: 10.1080/17487870701440598

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    References listed on IDEAS

    1. Robert M. Solow, 1961. "Note on Uzawa's Two-Sector Model of Economic Growth," Review of Economic Studies, Oxford University Press, vol. 29(1), pages 48-50.
    2. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 70(1), pages 65-94.
    3. Sgro, Pasquale M & Takayama, Akira, 1981. "On the Long-Run Growth Effects of a Minimum Wage for a Two-Sector Economy," The Economic Record, The Economic Society of Australia, vol. 57(157), pages 180-185, June.
    4. Richard A. Brecher, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, Oxford University Press, vol. 88(1), pages 98-116.
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    Cited by:

    1. Ka Wai Terence Fung & Chi Keung Marco Lau & Kwok Ho Chan, 2016. "An R&D-based real business cycle model," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 63(4), pages 327-358, December.

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    Minimum wage; decay; growth; unemployment;


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