Do minimum wages deliver what they promise? Effects of minimum wage on employment, output, and income inequality from occupational choice theory

Medrano-Adán, Luis ; Salas-Fumás, Vicente (Universidad de Zaragoza)

Resumen: This paper addresses the unresolved debate on the effects of minimum wages on output, employment, and income inequality by modeling an occupational choice economy calibrated for a representative OECD economy. The minimum wage sets a minimum skill requirement for employees, which reduces the effective labor supply and raises its price. Consequently, salaries increase, business profits fall, and some entrepreneurs transition to solo self-employment. With a minimum-to-average wage ratio of 0.43 (the OECD countries average in 2020), a 10% increase in the minimum wage reduces output, employment, and inequality among employees by 0.2%, 1.0%, and 2.1%, respectively, and increases total income inequality by 0.57%. If the minimum-to-average wage ratio were 0.55, output, employment, and inequality among employees would decrease by 0.87%, 3.55%, and 5.19%, respectively, and income inequality would rise by 2.09%. In summary, the effects are mainly negative, contrary to what is promised, and quantitatively large for high minimum-to-average wage ratios.

Idioma: Inglés

DOI: 10.1016/j.eap.2023.08.009

Año: 2023

Publicado en: Economic Analysis and Policy 80 (2023), 366-383
ISSN: 0313-5926

Factor impacto JCR: 7.9 (2023)

Categ. JCR: ECONOMICS rank: 11 / 600 = 0.018 (2023) - Q1 - T1

Factor impacto CITESCORE: 9.8 - Economics and Econometrics (Q1)

Factor impacto SCIMAGO: 1.597 - Economics, Econometrics and Finance (miscellaneous) (Q1) - Economics and Econometrics (Q1)

Tipo y forma: Article (Published version)

Área (Departamento): Área Organización de Empresas (Dpto. Direcc.Organiza.Empresas)