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Aggregate Effects of Minimum Wage Regulation at the Zero Lower Bound

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  • Andrew Glover

    (University of Texas Austin)

Abstract

The Fair Minimum Wage Act of 2007 increased the U.S. nominal minimum wage by 41 percent immediately prior to nominal interest rates hitting the Zero Lower Bound in 2008. I study the interaction of these two events in an extension of the sticky-price New Keynesian model. The minimum wage dampens the contractionary effects of the ZLB by preventing rapid wage deflation, halting the deflationary spiral caused by low aggregate demand. For sufficiently persistent ZLB shocks, the minimum wage generates infinite output gains relative to flexible wages, while GDP losses are reduced by half in a calibrated economy. Increasing the minimum wage at the ZLB is expansionary: accumulated output gains are more than 15 percent in the calibrated economy.

Suggested Citation

  • Andrew Glover, 2018. "Aggregate Effects of Minimum Wage Regulation at the Zero Lower Bound," 2018 Meeting Papers 1285, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:1285
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    File URL: https://economicdynamics.org/meetpapers/2018/paper_1285.pdf
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    References listed on IDEAS

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    1. Aggregate Effects of Minimum Wage Regulation at the Zero Lower Bound
      by Christian Zimmermann in NEP-DGE blog on 2018-10-20 20:17:16

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    Cited by:

    1. Pablo Cuba-Borda & Sanjay R. Singh, 2019. "Understanding Persistent Stagnation," International Finance Discussion Papers 1243, Board of Governors of the Federal Reserve System (U.S.).
    2. Guido Ascari & Jacopo Bonchi, 2019. "(Dis)Solving the Zero Lower Bound Equilibrium through Income Policy," Working Papers 10/19, Sapienza University of Rome, DISS.

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