Minimum wage, aggregate demand and employment: a demand-led model

This paper aims to examine the impact of minimum wages on aggregate demand and employment using a demand-led post-Kaleckian growth model. Benefitting from previous empirical work on wage- and profit-led growth and minimum wages, the model considers the impact of minimum wages on consumption, investment, and net exports through its effects on informality, prices, labour productivity, and distribution between workers and capitalists. The paper shows that higher minimum wages could lead to higher aggregate demand in the short run through higher consumption and investments in labour-saving technologies, which could reduce the possible negative effects of minimum wages on employment or create additional employment. If higher minimum wages have a strong impact on informality, then the impact of minimum wages on consumption and net exports is less positive and less negative, respectively. Higher minimum wages are also likely to increase labour productivity in both the short and medium run, which would have further effects on aggregate demand, employment, and prices. Finally, higher minimum wages are likely to affect aggregate demand and employment in small open economies more negatively or less positively.