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Household labor supply, unemployment, and minimum wage legislation

  • Basu, Kaushik
  • Genicot, Garance
  • Stiglitz, Joseph E.

The supply behavior of labor often depends on the demand conditions prevailing in the labor market. If demand is inadequate, households may send additional household members, who otherwise would not have worked, to look for work, for fear the main income earner may lose his job. The authors study the theoretical consequences of this"added worker"effect. They show that it can rise to multiple equilibria in the labor market. Surprisingly, a minimum wage law set below the prevailing market wage can cause the market wage to fall and unemployment to rise. Unemployment benefits, by countering some of the risks of unemployment, can neutralize the inefficiencies caused by households'tendency to oversupply labor.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2049.

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Date of creation: 28 Feb 1999
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Handle: RePEc:wbk:wbrwps:2049
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  1. Flinn, Christopher J & Heckman, James J, 1983. "Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States?," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 28-42, January.
  2. Layard, R & Barton, M & Zabalza, A, 1980. "Married Women's Participation and Hours," Economica, London School of Economics and Political Science, vol. 47(185), pages 51-72, February.
  3. Greenwald, Bruce C & Stiglitz, Joseph E, 1995. "Labor-Market Adjustments and the Persistence of Unemployment," American Economic Review, American Economic Association, vol. 85(2), pages 219-25, May.
  4. Basu, Kaushik, 1998. "Child labor : cause, consequence, and cure, with remarks on International Labor Standards," Policy Research Working Paper Series 2027, The World Bank.
  5. Fleisher, Belton M & Rhodes, George, 1976. "Unemployment and the Labor Force Participation of Married Men and Women: A Simultaneous Model," The Review of Economics and Statistics, MIT Press, vol. 58(4), pages 398-406, November.
  6. Lundberg, Shelly, 1985. "The Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 11-37, January.
  7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  8. Stiglitz, Joseph E, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 194-227, May.
  9. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August.
  10. Ashenfelter, Orley, 1980. "Unemployment as Disequilibrium in a Model of Aggregate Labor Supply," Econometrica, Econometric Society, vol. 48(3), pages 547-64, April.
  11. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  12. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March.
  13. Schlicht, Ekkehart, 1978. "Labour Turnover, Wage Structure, and Natural Unemployment," Munich Reprints in Economics 1255, University of Munich, Department of Economics.
  14. Stiglitz, Joseph E, 1976. "The Efficiency Wage Hypothesis, Surplus Labour, and the Distribution of Income in L.D.C.s," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 185-207, July.
  15. Fortin, Bernard & Lacroix, Guy, 1997. "A Test of the Unitary and Collective Models of Household Labour Supply," Economic Journal, Royal Economic Society, vol. 107(443), pages 933-55, July.
  16. Basu, Kaushik & Van, Pham Hoang, 1998. "The Economics of Child Labor," American Economic Review, American Economic Association, vol. 88(3), pages 412-27, June.
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