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Dynamic Effects of Minimum Wage on Growth and Innovation in a Schumpeterian Economy

Chu, Angus C. and Kou, Zonglai and Wang, Xilin (2019): Dynamic Effects of Minimum Wage on Growth and Innovation in a Schumpeterian Economy. Forthcoming in: Economics Letters

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Abstract

We explore the dynamic effects of minimum wage in a Schumpeterian model with endogenous market structure and obtain the following results. First, raising the minimum wage decreases the employment of low-skill workers and increases the unemployment rate. Second, it decreases the level of output. Third, it decreases the transitional growth rate of output but does not affect the steady-state growth rate. Our quantitative analysis shows that the magnitude of the negative effects of minimum wage is sharply increasing in low-skill labor intensity in production and that employed low-skill workers gain initially but might suffer from slower growth in future wages.

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