Contrary to conventional wisdom, higher minimum wages may lead to greater levels of employment under perfect competition. We demonstrate this possibility in a simple general-equilibrium model of involuntary unemployment, with two goods produced by two factors and consumed by two representative households. Within our model, hiking a minimum wage redistributes income between heterogeneous consumers. This redistribution may create an excess demand for the labor-intensive good, and hence increase total employment to restore equilibrium, despite the fact that every firm becomes less labor intensive.

Additional Metadata
Persistent URL dx.doi.org/10.1111/roie.12322
Journal Review of International Economics
Citation
Brecher, R.A, & Gross, T. (2018). Employment gains from minimum-wage hikes under perfect competition: A simple general-equilibrium analysis. Review of International Economics, 26(1), 165–170. doi:10.1111/roie.12322