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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. Stephan Klasen & Ingrid Woolard, 2001. "Surviving Unemployment without State Support: Unemployment and Household Formation in South Africa," CESifo Working Paper Series 533, CESifo Group Munich.
  2. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
  3. David Neumark & William Wascher, 1997. "Do Minimum Wages Fight Poverty?," NBER Working Papers 6127, National Bureau of Economic Research, Inc.
  4. Adams, Scott & Neumark, David, 2005. "The Effects of Living Wage Laws: Evidence from Failed and Derailed Living Wage Campaigns," IZA Discussion Papers 1566, Institute for the Study of Labor (IZA).
  5. Nora Lustig & Darryl McLeod, 1996. "Minimum Wages and Poverty in Developing Countries: Some Evidence," Discussion Papers 125, Brookings Institution International Economics.
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