Employment gains from minimum†wage hikes under perfect competition: A simple general†equilibrium analysis

Richard Brecher and Till Gross ()

Review of International Economics, 2018, vol. 26, issue 1, 165-170

Abstract: 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.

Date: 2018
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