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

Luis Medrano-Adán and Vicente Salas-Fumás

Economic Analysis and Policy, 2023, vol. 80, issue C, 366-383

Abstract: 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.

Keywords: Minimum wage; Occupational choice; Employment; Income distribution; Income inequality; Economic efficiency (search for similar items in EconPapers)
JEL-codes: D31 E24 J24 K31 L26 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:80:y:2023:i:c:p:366-383

DOI: 10.1016/j.eap.2023.08.009

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