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

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  • 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 of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3381
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    Cited by:

    1. Hansa Jain, 2019. "Wage–Productivity Relationship in Indian Manufacturing Industries: Evidences from State-level Panel Data," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 13(3), pages 277-305, August.
    2. Bruce Kaufman, 2016. "Adam Smith’s Economics and the Modern Minimum Wage Debate:The Large Distance Separating Kirkcaldy from Chicago," Journal of Labor Research, Springer, vol. 37(1), pages 29-52, March.
    3. John G. Sessions & John D. Skåtun, 2017. "Performance-Related Pay, Efficiency Wages and the Shape of the Tenure-Earnings Profile," Manchester School, University of Manchester, vol. 85(3), pages 295-319, June.
    4. Servaas Storm, 2019. "Labor Laws and Manufacturing Performance in India: How Priors Trump Evidence and Progress Gets Stalled," Working Papers Series 90, Institute for New Economic Thinking.
    5. 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 15567, Universidad del Rosario.
    6. Kaushik Basu, 2016. "Beyond the Invisible Hand: Groundwork for a New Economics," Economics Books, Princeton University Press, edition 1, number 9299.

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    More about this item

    Keywords

    South Africa; racial differences; minimum wage law; efficiency wage; unemployment;
    All these keywords.

    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

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