Employment Gains from Minimum-Wage Hikes under Perfect Competition: A Simple General-Equilibrium Analysis

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.