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Minimum Wages And Poverty

  • Ravi Kanbur

    ()

  • Gary Fields

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 labordemand, 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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Paper provided by eSocialSciences in its series Working Papers with number id:169.

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Date of creation: Aug 2005
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Handle: RePEc:ess:wpaper:id:169
Note: Working Papers
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  1. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August.
  2. Scott Adams & David Neumark, 2004. "The Effects of Living Wage Laws: Evidence From Failed and Derailed Living Wage Campaigns," PPIC Working Papers 2004.12, Public Policy Institute of California.
  3. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December.
  4. Lustig, N. & Mcleod, D., 1996. "Minimum Wages and Poverty in Developing Countries : Some Empirical Evidence," Papers 125, Brookings Institution - Working Papers.
  5. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
  6. Stephen Klasen & Ingrid Woolard, 2005. "Surviving unemployment without state support: Unemployment and household formation in South Africa," SALDRU/CSSR Working Papers 129, Southern Africa Labour and Development Research Unit, University of Cape Town.
  7. Nora Lustig & Darryl McLeod, 1996. "Minimum Wages and Poverty in Developing Countries: Some Evidence," Discussion Papers 125, Brookings Institution International Economics.
  8. Daniel S. Hamermesh, 1993. "Labor Demand and the Source of Adjustment Costs," NBER Working Papers 4394, National Bureau of Economic Research, Inc.
  9. Alan B. Krueger & David Card, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply," American Economic Review, American Economic Association, vol. 90(5), pages 1397-1420, December.
  10. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  11. Fields, Gary S., 1997. "Wage floors and unemployment: A two-sector analysis," Labour Economics, Elsevier, vol. 4(1), pages 85-91, March.
  12. repec:sae:ilrrev:v:49:y:1996:i:3:p:547-552 is not listed on IDEAS
  13. 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.
  14. David Neumark & William Wascher, 2002. "Do Minimum Wages Fight Poverty?," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 315-333, July.
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