Economic Growth and Welfare in a Simple Neoclassical OLG Model with Minimum Wage and Consumption Taxes support
Since little attention, despite a long lasting debate, has been paid to the effects of minimum wages on economic growth and welfare, this paper investigates such effects within a textbook OLG framework with an unemployment insurance scheme financed at balanced budget by the government with a consumption tax on the young individuals. Some new results, so far escaped closer scrutiny by the economic growth literature and which may have interesting policy implications, emerge: i) introducing minimum wages may have a favourable impact on the long run output levels; ii) under suitable conditions a regulated-wage economy performs always better than a competitive economy, iii) despite the fact that the tax rate tends to reduce the consumption of the young, the long run lifetime welfare may be greater than in the competitive economy; iv) a welfare-maximising value of the minimum wage (and thus of the proportional consumption tax rate) is picked up.
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