The rational of minimum wages

Hansjörg Herr

No 35, ICDD Working Papers from University of Kassel, Fachbereich Gesellschaftswissenschaften (Social Sciences), Internatioanl Center for Development and Decent Work (ICDD)

Abstract: Leaving labour markets to the market mechanism with flexible wages is the worst thing that can happen as the result would be a permanent destabilisation of the price level and an explosion of inequality—both of which adds to the instabilities of capitalism. Guarantee of minimum wages can play an important role to contain the destabilising potential of labour markets. They can add to the stability of price level development and help establish a type of wage dispersion preferred by society. Minimum wages do not lead to unemployment. Countries with very high wage dispersion can have high unemployment while those with low wage dispersion might ensure full employment. Looking at the distribution effect, minimum wage increases (which compress the wage structure from below) not only lead to redistribution within wage earners, but also can increase wage shares. Minimum wage policy should play an important and active role in macroeconomic management of an economy which in turn is linked with macroeconomic demand management so that the employment rate is maintained high.

Pages: 29 pages
Date: 2021-03
New Economics Papers: this item is included in nep-cwa
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