Worker Heterogeneity and the Popularity of the Minimum Wage Institution

Authors

  • George Economides Department of International and European Economic Studies, Athens University of Economics and Business
  • Thomas Moutos Department of International and European Economic Studies, Athens University of Economics and Business

DOI:

https://doi.org/10.15353/rea.v11i1.1515

Abstract

This paper analyzes long run outcomes resulting from adopting a binding minimum wage. The model distinguishes between workers of heterogeneous ability, and capitalists who do all the saving, and it entails – relative to the perfectly competitive benchmark - large output and employment losses (among the lowest-ability workers) from the imposition of moderately binding minimum wages. These effects arise not only because firms respond to the wage increase – relative to the static perfectly competitive benchmark – by moving upwards along a given labour demand curve, but also due to inward shifts of the labour demand curve as savers respond to decreases in the (net of taxes) rate of return on their savings by saving less, thus reducing the economy’s steady-state capital stock. Nevertheless, and despite the large, long-run, declines in aggregate output, consumption, and the capital stock implied by this model, MW legislation can be beneficial for large segments of employed workers, as long as they do not have to provide generous welfare support to the low-ability workers that the MW prevents them from finding employment.

Author Biographies

George Economides, Department of International and European Economic Studies, Athens University of Economics and Business

Associate Professor

Department of International and European Economic Studies

Thomas Moutos, Department of International and European Economic Studies, Athens University of Economics and Business

Professor, Department of International and European Economic Studies

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Published

2019-06-30

Issue

Section

Articles