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A Minimum-Wage Model of Unemployment and Growth: The Case of a Backward-Bending Demand Curve for Labor

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 possibility provides theoretical support for some controversial empirical studies, which challenge the 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.

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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 14-05.

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Length: 24 pages
Date of creation: 03 Jul 2014
Date of revision:
Publication status: Published: Carleton Economic Papers
Handle: RePEc:car:carecp:14-05
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  1. Cahuc, P. & Michel, P., 1992. "Minimum Wage, Unemployment and Growth," Papiers d'Economie Mathématique et Applications 92.35, Université Panthéon-Sorbonne (Paris 1).
  2. Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
  3. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
  4. Bagicha S. Minhas, 1962. "The Homohypallagic Production Function, Factor-Intensity Reversals, and the Heckscher-Ohlin Theorem," Journal of Political Economy, University of Chicago Press, vol. 70, pages 138.
  5. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  6. repec:tpr:qjecon:v:110:y:1995:i:4:p:1111-25 is not listed on IDEAS
  7. Neumark, David & Salas, J.M. Ian & Wascher, William, 2013. "Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater?," IZA Discussion Papers 7166, Institute for the Study of Labor (IZA).
  8. Daron Acemoglu, 2009. "When Does Labor Scarcity Encourage Innovation?," NBER Working Papers 14809, National Bureau of Economic Research, Inc.
  9. T.N. Srinivasan, 1962. "On a Two Sector Model of Growth," Cowles Foundation Discussion Papers 139R, Cowles Foundation for Research in Economics, Yale University.
  10. Brecher, Richard A., 1974. "Optimal commercial policy for a minimum-wage economy," Journal of International Economics, Elsevier, vol. 4(2), pages 139-149, May.
  11. Richard A. Brecher & Zhiqi Chen & Zhihao Yu, 2011. "The Trouble with Offshoring: Static and Dynamic Losses in the Presence of Unemployment," Carleton Economic Papers 11-02, Carleton University, Department of Economics, revised Jan 2013.
  12. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA).
  13. Alan Manning, 1994. "How do we Know that Real Wages are Too High?," CEP Discussion Papers dp0195, Centre for Economic Performance, LSE.
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