Stagnation and minimum wage: Optimal minimum wage policy in macroeconomics

Yamaguchi, Masao (2017): Stagnation and minimum wage: Optimal minimum wage policy in macroeconomics.

Abstract

This paper argues how an increase in minimum wage affects employment, consumption, and social welfare with dynamic general equilibrium model without market frictions. The study demonstrates that a minimum wage hike reduces an actual unemployment rate and has positive effects on an employment rate under the demand-shortage economy whereas they do not under a non-demand shortage economy. The study also shows that optimal minimum wage which maximize social welfare and minimize an actual unemployment rate when the economy faces the demand-shortage initially. These findings imply that the minimum wage can be considered as one of the effective policy for overcoming deflation and stagnation although it increases the natural rate of unemployment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Minimum wage, Unemployment, Natural rate of unemployment, Deflation, Stagnation, Demand shortage, Dynamic general equilibrium model
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J38 - Public Policy

References

[1] Acemoglu, Daron (2001) “Good jobs versus bad jobs.” Journal of Labor Economics, Vol 19(1), 1-20.

[2] Allegretto, Sylvia A., Arindrajit Dube, and Michael Reich (2011) “Do minimum wages really reduce teen employment? Accounting for heterogeneity and selectivity in state panel data.” Industrial Relations, Vol 50(2), 205-240.

[3] Allegretto, Sylvia A., Arindrajit Dube, Michael Reich, and Ben Zipperer (2017) “Credible Research Designs for Minimum Wage Studies: A Response to Neumark, Salas, and Wascher.” ILR Review, Vol 70(3), 559-592.

[4] Ball, Laurence, and N. Gregory Mankiw (2002) “The NAIRU in theory and practice.” Journal of Economic Perspectives, Vol 16, 115-136.

[5] Bhaskar, Venkataraman, andTedTo(1999)“MinimumwagesforRonaldMcDonald monopsonies: A theory of monopsonistic competition.” Economic Journal, Vol 109, 190-203.

[6] Buiter, Willem (1984) “Saddlepoint problems in continuous time rational expectations models: A general method and some macroeconomic examples.” Econometrica, Vol. 52(3), 665-680.

[7] Blanchard, Olivier, and Lawrence F. Katz (1997) “What we know and do not know about the natural rate of unemployment.” Journal of Economic Perspectives, Vol 11(1), 51-72.

[8] Cahuc, Pierre, and Philippe Michel (1996) “Minimum wage unemployment and growth.” European Economic Review, Vol 40, 1463-1482.

[9] Dube, Arindrajit, T. William Lester, and Michael Reich (2010) “Minimum wage effects across state borders: estimates using contiguous counties.” Review of economics and statistics, Vol 92(4), 945-964.

[10] Falk, Armin, Ernst Fehr, and Christian Zehnder (2006) “Fairness perceptions and reservationwages–thebehavioraleffectsofminimumwagelaws.”Quarterly Journal of Economics, 121(4), 1347-1381.

[11] Fanti, Luciano, and Luca Gori (2011) “On economic growth and minimum wages.” Journal of Economics, Vol 103, 59-82.

[12] Flinn, Christopher J. (2006) “Minimum wage effects on labor market outcomes under search, matching, and endogeneous contract rates.” Econometrica, Vol 74(4), 1013-1062.

[13] Friedman, Miloton (1968). “The role of monetary policy,” American Economic Review, 58(1), 1-17.

[14] Honkapohja, Seppa (1980). “The Employment multiplier after disequilibrium dynamics.” The Scandinavian Journal of Economics, Vol. 82(1) , 1-14.

[15] Irmen, Andreas, andBertholdU.Wigger.(2006)“Nationalminimumwages, capital mobility, and global economic growth.” Economics Letters, Vol 90(2), 285-289.

[16] Keynes, John Maynard (1936) The general theory of employment, interest and money. BN Publishing in 2008.

[17] Lee, David and Emmanuel Saez (2012) “Optimal minimum wage policy in competitive labor markets.” Journal of Public Economics, Vol 96, 739-747.

[18] Manning, Alan (2003) Monopsony in motion: Imperfect competition in labor markets. Princeton University Press.

[19] Manning, Alan (2016) “The elusive employment effect of the minimum wage.” CEP Discussion Paper No 1428. Centre for Economic Performance and London School of Economics and Political Science.

[20] Meckl, Jurgen (2004) “Accumulation of technological knowledge, wage differentials, and unemployment.” Journal of Macroeconomics, Vol 26, 65-82. 25

[21] Neumark, David, J. M. Salas, and William Wascher (2014) “Revisiting the minimum wage-employment debate: Throwing out the baby with the bathwater?.” ILR Review, Vol 67(3), 608-648.

[22] Ono, Yoshiyasu (2001) “A reinterpretation of Chapter 17 of Keynes’s General Theory: effective demand shortage under dynamic optimization.” International Economic Review, Vol 42(1), 207-236.

[23] Ono, Yoshiyasu, Kazuo Ogawa, and Atsushi Yoshida (2004) “The liquidity trap and persistent unemployment with dynamic optimizing agents: Empirical evidence.” Japanese Economic Review, Vol 55(4), 355-371.

[24] Rebitzer, James B., and Lowell J. Taylor (1995) “The consequences of minimum wage laws some new theoretical ideas.” Journal of Public Economics, Vol 56, 245255.

[25] Shapiro, Carl, and Joseph E. Stiglitz. (1984) “Equilibrium unemployment as a worker discipline device.” American Economic Review, Vol 74(3), 433-444.

[26] Summers, Lawrence H. (1988). “Relative wages, efficiency wages, and Keynesian unemployment.” American Economic Review, Vol 78(2), 383-388.

[27] Tamai, Toshiki (2009) “Inequality, unemployment, and endogenous growth in a political economy with a minimum wage.” Journal of Economics, Vol 103, 217-232.