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Minimum Wages: Curse or Blessing?

Author

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  • Ravn, Morten O
  • Sorensen, Jan Rose

Abstract

In this paper we consider the effects of minimum wage legislation in an overlapping generations model. In our model there is an intergenerational externality in the accumulation of human capital since the production of human capital of every new generation depends positively on the average human capital stock of the preceding generation. This externality means that the competitive equilibrium allocation is sub-optimal, and every generation accumulates too little human capital. We show that in the case of identical agents, a minimum wage above the market wage can increase human capital accumulation and welfare. Furthermore, the first-best allocation can be attained through the implementation of a minimum wage. We introduce a cross-agent heterogeneity such that agents differ in their ability to produce human capital. In this case a (binding) minimum wage may produce unemployment, and it may increase or decrease human capital accumulation.

Suggested Citation

  • Ravn, Morten O & Sorensen, Jan Rose, 1995. "Minimum Wages: Curse or Blessing?," CEPR Discussion Papers 1212, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1212
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    Citations

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    Cited by:

    1. Jonas Agell, 2004. "Efficiency and Equality in the Labour Market," CESifo Economic Studies, CESifo, vol. 50(2), pages 255-278.
    2. Dessing, Maryke, 2004. "Implications for minimum-wage policies of an S-shaped labor-supply curve," Journal of Economic Behavior & Organization, Elsevier, vol. 53(4), pages 543-568, April.
    3. Toke Aidt & Zafiris Tzannatos, 2002. "Unions and Collective Bargaining : Economic Effects in a Global Environment," World Bank Publications, The World Bank, number 15241, June.
    4. Torben M.Andersen, 1995. "Unemployment Policy in the Welfare State," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 22, pages 27-39.
    5. James J. Heckman & Jonas Agell & Florian Gertser & Merz Friedrich, 2003. "The Labour Market and the Job Miracle," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(2), pages 29-48, October.

    More about this item

    Keywords

    Human Capital Accumulation; Intergenerational Externality; Minimum Wages; Overlapping Generations;

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • I29 - Health, Education, and Welfare - - Education - - - Other

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