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Employment gains from minimum‐wage hikes under perfect competition: A simple general‐equilibrium analysis
Author(s) -
Brecher Richard A.,
Gross Till
Publication year - 2018
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12322
Subject(s) - economics , unemployment , general equilibrium theory , redistribution (election) , labour economics , involuntary unemployment , competition (biology) , minimum wage , microeconomics , efficiency wage , wage , simple (philosophy) , macroeconomics , ecology , philosophy , epistemology , politics , biology , political science , law
Contrary to conventional wisdom, higher minimum wages may lead to greater levels of employment under perfect competition. We demonstrate this possibility in a simple general‐equilibrium model of involuntary unemployment, with two goods produced by two factors and consumed by two representative households. Within our model, hiking a minimum wage redistributes income between heterogeneous consumers. This redistribution may create an excess demand for the labor‐intensive good, and hence increase total employment to restore equilibrium, despite the fact that every firm becomes less labor intensive.