Contrary to conventional wisdom, higher minimum wages may lead to greater levels of employment under perfect competition. We demonstrate this possibility in a simple generalequilibrium model 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 laborintensive good, and hence increase employment to restore equilibrium, despite the fact that every firm becomes less labor intensive.

Minimum Wage, Employment, Unemployment, Marshall-Lerner Condition
Public Policy (jel J38), Unemployment: Models, Duration, Incidence, and Job Search (jel J64), Trade and Labor Market Interactions (jel F16), Neoclassical Models of Trade (jel F11)
Department of Economics
Carleton Economics Working Papers (CEWP)
Department of Economics

Brecher, R.A, & Gross, T. (2014). Employment Gains from Minimum-Wage Hikes under Perfect Competition: A Simple General-Equilibrium Analysis (No. CEP 14-14). Carleton Economics Working Papers (CEWP). Department of Economics.