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Minimum Wages and Poverty

  • Fields, Gary S.
  • Kanbur, Ravi

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 two 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 incomesharing between the employed and the unemployed. 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 incomesharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage.

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File URL: http://purl.umn.edu/127086
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Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 127086.

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Date of creation: 2005
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Handle: RePEc:ags:cudawp:127086
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  1. 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.
  2. Lustig, N. & Mcleod, D., 1996. "Minimum Wages and Poverty in Developing Countries : Some Empirical Evidence," Papers 125, Brookings Institution - Working Papers.
  3. Adams, Scott & Neumark, David, 2005. "The effects of living wage laws: Evidence from failed and derailed living wage campaigns," Journal of Urban Economics, Elsevier, vol. 58(2), pages 177-202, September.
  4. David Neumark & William Wascher, 1997. "Do Minimum Wages Fight Poverty?," NBER Working Papers 6127, National Bureau of Economic Research, Inc.
  5. Nora Lustig & Darryl McLeod, 1996. "Minimum Wages and Poverty in Developing Countries: Some Evidence," Discussion Papers 125, Brookings Institution International Economics.
  6. 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.
  7. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August.
  8. Fields, Gary S., 1997. "Wage floors and unemployment: A two-sector analysis," Labour Economics, Elsevier, vol. 4(1), pages 85-91, March.
  9. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  10. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
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