Household labor supply, unemployment, and minimum wage legislation
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.
|Date of creation:||28 Feb 1999|
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- Flinn, Christopher J & Heckman, James J, 1983.
"Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States?,"
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Policy Research Working Paper Series
2027, The World Bank.
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- 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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