A Theory of Efficiency Wage with Multiple Unemployment Equilibria: How a Higher Minimum Wage Law Can Curb Unemployment

Kaushik Basu and Amanda J. Felkey ()
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Amanda J. Felkey: Lake Forest College

No 3381, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper uses efficiency wage theory and the existence of community-based sharing to hypothesize that labor markets in developing countries have multiple equilibria – the same economy can be stuck at different levels of unemployment with different levels of wages. The model is meant for developing economies where wage-productivity links are discernible and income-sharing among the poor is prevalent. It seems reasonable to posit that in such an economy more unemployment leads to more income sharing. The main results are generated combining this claim with a theoretical demonstration of the fact that more sharing increases unemployment rates. As corollaries, we show that (1) within the same society, two different racial groups that may be ex ante identical can have different levels of unemployment and wages in equilibrium and (2) the imposition of a legal minimum wage can raise employment.

Keywords: South Africa; racial differences; minimum wage law; efficiency wage; unemployment (search for similar items in EconPapers)
JEL-codes: D40 J60 O12 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2008-03
New Economics Papers: this item is included in nep-afr and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published - published in: Oxford Economic Papers, 2009, 61 (3), 494-516

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Journal Article: A theory of efficiency wage with multiple unemployment equilibria: how a higher minimum wage law can curb unemployment (2009)
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