Minimum wages and poverty with income-sharing

Gary Fields () and Ravi Kanbur

The Journal of Economic Inequality, 2007, vol. 5, issue 2, 135-147

Abstract: Textbook analysis tells us that in a competitive labor market, the introduction of a minimum wage above the competitive equilibrium wage will cause unemployment. This paper makes three contributions to the basic theory of the minimum wage. First, we analyze the effects of a higher minimum wage in terms of poverty rather than in terms of unemployment. Second, we extend the standard textbook model to allow for income-sharing between employed and unemployed persons in society. Third, we extend the basic model to deal with income sharing within families. We find that there are situations in which a higher minimum wage raises poverty, others where it reduces poverty, and yet others in which poverty is unchanged. We characterize precisely how the poverty effect depends on four parameters: the degree of poverty aversion, the elasticity of labor demand, the ratio of the minimum wage to the poverty line, and the extent of income-sharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage. Copyright Springer Science+Business Media, Inc. 2007

Keywords: minimum wage; poverty; unemployment; D6; I32; J3; J64 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (25)

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DOI: 10.1007/s10888-006-9037-5

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