Household labor supply, unemployment, and minimum wage legislation

Kaushik Basu, Garance Genicot and Joseph Stiglitz

No 2049, Policy Research Working Paper Series from The World Bank

Abstract: The supply behavior of labor often depends on the demand conditions prevailing in the labor market. If demand is inadequate, households may send additional household members, who otherwise would not have worked, to look for work, for fear the main income earner may lose his job. The authors study the theoretical consequences of this"added worker"effect. They show that it can rise to multiple equilibria in the labor market. Surprisingly, a minimum wage law set below the prevailing market wage can cause the market wage to fall and unemployment to rise. Unemployment benefits, by countering some of the risks of unemployment, can neutralize the inefficiencies caused by households'tendency to oversupply labor.

Keywords: Economic Theory&Research; Labor Policies; Health Economics&Finance; Labor Markets; Environmental Economics&Policies; Health Economics&Finance; Labor Markets; Access to Markets; Environmental Economics&Policies; Economic Theory&Research (search for similar items in EconPapers)
Date: 1999-02-28
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Citations: View citations in EconPapers (14)

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