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How Minimum Wages affect Automation and Innovation in a Schumpeterian Economy

Chu, Angus C. and Cozzi, Guido and Fan, Haichao and Furukawa, Yuichi and Liao, Chih-Hsing (2020): How Minimum Wages affect Automation and Innovation in a Schumpeterian Economy.

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Abstract

This study explores the effects of minimum wage on automation and innovation in a Schumpeterian growth model. We find that raising the minimum wage decreases the employment of low-skill workers and has ambiguous effects on innovation and automation. Specifically, if the elasticity of substitution between low-skill workers and high-skill workers in production is less (greater) than unity, then raising the minimum wage leads to an increase (a decrease) in automation and innovation. We also provide a quantitative analysis by simulating the effects of minimum wage on the macroeconomy. Finally, we test our theoretical results by estimating the elasticity of substitution between low-skill workers and high-skill workers and the effects of minimum wage on automation and innovation in China.

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