We add a minimum wage and hence involuntary unemployment to a conventional two-sector model of a perfectly competitive economy with optimal saving and endogenous growth. Our resulting model highlights the possible case of a backward-bending demand curve for labor, along which a hike in the minimum wage might increase total employment. This possibility provides theoretical support for some controversial empirical studies, which challenge the textbook prediction of an inverse relationship between employment and the minimum wage. Our model also implies that a minimum-wage hike has negative implications for both the growth rate and lifetime utility

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Department of Economics
Carleton Economics Working Papers (CEWP)
Department of Economics

Brecher, R.A, & Gross, T. (2014). A Minimum-Wage Model of Unemployment and Growth: The Case of a Backward-Bending Demand Curve for Labor (No. CEP 14-05). Carleton Economics Working Papers (CEWP). Department of Economics.