IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp3381.html
   My bibliography  Save this paper

A Theory of Efficiency Wage with Multiple Unemployment Equilibria: How a Higher Minimum Wage Law Can Curb Unemployment

Author

Listed:
  • Basu, Kaushik

    () (World Bank)

  • Felkey, Amanda J.

    () (Lake Forest College)

Abstract

This paper uses efficiency wage theory and the existence of community-based sharing to hypothesize that labor markets in developing countries have multiple equilibria – the same economy can be stuck at different levels of unemployment with different levels of wages. The model is meant for developing economies where wage-productivity links are discernible and income-sharing among the poor is prevalent. It seems reasonable to posit that in such an economy more unemployment leads to more income sharing. The main results are generated combining this claim with a theoretical demonstration of the fact that more sharing increases unemployment rates. As corollaries, we show that (1) within the same society, two different racial groups that may be ex ante identical can have different levels of unemployment and wages in equilibrium and (2) the imposition of a legal minimum wage can raise employment.

Suggested Citation

  • Basu, Kaushik & Felkey, Amanda J., 2008. "A Theory of Efficiency Wage with Multiple Unemployment Equilibria: How a Higher Minimum Wage Law Can Curb Unemployment," IZA Discussion Papers 3381, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3381
    as

    Download full text from publisher

    File URL: http://ftp.iza.org/dp3381.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Basu, Kaushik, 2000. "The Intriguing Relation between Adult Minimum Wage and Child Labour," Economic Journal, Royal Economic Society, vol. 110(462), pages 50-61, March.
    2. Philippe Aghion & Olivier J. Blanchard, 1994. "On the Speed of Transition in Central Europe," NBER Chapters,in: NBER Macroeconomics Annual 1994, Volume 9, pages 283-330 National Bureau of Economic Research, Inc.
    3. Bliss, Christopher & Stern, Nicholas, 1978. "Productivity, wages and nutrition : Part II: Some observations," Journal of Development Economics, Elsevier, vol. 5(4), pages 363-398, December.
    4. Jean-Philippe Platteau, 1997. "Mutual insurance as an elusive concept in traditional rural communities," Journal of Development Studies, Taylor & Francis Journals, vol. 33(6), pages 764-796.
    5. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-591, May.
    6. Kaushik Basu, 2003. "Analytical Development Economics: The Less Developed Economy Revisited," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262523442, January.
    7. Ravallion, Martin & Dearden, Lorraine, 1988. "Social Security in a "Moral Economy": An Empirical Analysis for Java," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 36-44, February.
    8. Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, vol. 96(384), pages 1011-1034, December.
    9. Kaushik Basu, 2006. "Gender and Say: a Model of Household Behaviour with Endogenously Determined Balance of Power," Economic Journal, Royal Economic Society, vol. 116(511), pages 558-580, April.
    10. Harvey Leibenstein, 1958. "Underemployment in Backward Economies: Some Additional Notes," Journal of Political Economy, University of Chicago Press, vol. 66, pages 256-256.
    11. Garance Genicot, 2005. "Malnutrition and Child Labor," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(1), pages 83-102, March.
    12. Cox, Donald & Eser, Zekeriya & Jimenez, Emmanuel, 1998. "Motives for private transfers over the life cycle: An analytical framework and evidence for Peru," Journal of Development Economics, Elsevier, vol. 55(1), pages 57-80, February.
    13. Strauss, John & Thomas, Duncan, 1995. "Human resources: Empirical modeling of household and family decisions," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 34, pages 1883-2023 Elsevier.
    14. Rodgers, G B, 1975. "Nutritionally Based Wage Determination in the Low-Income Labour Market," Oxford Economic Papers, Oxford University Press, vol. 27(1), pages 61-81, March.
    15. Philippe Aghion & Olivier Jean Blanchard, 1994. "On the Speed of Transition Central Europe," NBER Working Papers 4736, National Bureau of Economic Research, Inc.
    16. Anjini Kochar, 2000. "Parental Benefits from Intergenerational Coresidence: Empirical Evidence from Rural Pakistan," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1184-1209, December.
    17. Hoff, Karla & Sen, Arijit, 2005. "The kin system as a poverty trap?," Policy Research Working Paper Series 3575, The World Bank.
    18. Strauss, J. & Thomas, D., 1995. "Empirical Modeling of Household and Family Decisions," Papers 95-12, RAND - Reprint Series.
    19. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:bla:manchs:v:85:y:2017:i:3:p:295-319 is not listed on IDEAS
    2. Albert Berry, 2017. "Employment and Efficiency Effects of Social Security (SS) and Social Protection (SP) Systems in the Context of an Informal Sector and Market Imperfections: A Conceptual Review," DOCUMENTOS DE TRABAJO 015567, UNIVERSIDAD DEL ROSARIO.

    More about this item

    Keywords

    South Africa; racial differences; minimum wage law; efficiency wage; unemployment;

    JEL classification:

    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp3381. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak). General contact details of provider: http://www.iza.org .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.