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A Minimum-Wage Model of Unemployment and Growth: The Case of a Backward-Bending Demand Curve for Labor

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Abstract
We add a minimum wage and hence involuntary unemployment to a conventional two-sector model of a perfectly competitive economy with optimal saving and endogenous growth. Our resulting model highlights the possible case of a backward-bending demand curve for labor, along which a hike in the minimum wage might increase total employment. This possibility provides theoretical support for some controversial empirical studies, which challenge the textbook prediction of an inverse relationship between employment and the minimum wage. Our model also implies that a minimum-wage hike has negative implications for both the growth rate and lifetime utility.

Suggested Citation

  • Richard A. Brecher & Till O. Gross, 2014. "A Minimum-Wage Model of Unemployment and Growth: The Case of a Backward-Bending Demand Curve for Labor," Carleton Economic Papers 14-05, Carleton University, Department of Economics.
    • Handle: RePEc:car:carecp:14-05
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    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    2. Neumark, David & Salas, J.M. Ian & Wascher, William, 2013. "Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater?," IZA Discussion Papers 7166, Institute of Labor Economics (IZA).
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    6. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute of Labor Economics (IZA).
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    12. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
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    Cited by:

    1. Richard A. Brecher & Till Gross, 2020. "Unemployment and income‐distribution effects of economic growth: A minimum‐wage analysis with optimal saving," International Journal of Economic Theory, The International Society for Economic Theory, vol. 16(3), pages 243-259, September.
    2. Richard A. Brecher & Till O. Gross, 2014. "Employment Gains from Minimum-Wage Hikes under Perfect Competition: A Simple General-Equilibrium Analysis," Carleton Economic Papers 14-14, Carleton University, Department of Economics.
    3. Sugata Marjit & Shrimoyee Ganguly & Rajat Acharyya, 2021. "Minimum wage, trade and unemployment in general equilibrium," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(1), pages 74-87, March.

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    More about this item

    Keywords

    Optimal growth; Minimum wage; Learning by doing; Involuntary unemployment;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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