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

Additional Metadata
Keywords Optimal growth, Minimum wage, Learning by doing, Involuntary unemployment
Publisher Department of Economics
Series Carleton Economic Papers (CEP)
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 Economic Papers (CEP). Department of Economics.