Can Minimum Wages Raise Workers' Incomes in the Long Run?

Category: Quantitative Economic Policy Seminar
When: 27 June 2016
, 18:00
 - 19:30
Speaker: Thomas Moutos

Using an intertemporal model of saving and capital accumulation with two types of agents (workers and capitals) we demonstrate that it is impossible for any binding minimum wage to increase the after-tax incomes of workers if the production function is Cobb-Douglas with constant returns to scale, or if there are no differences in ability among workers. We also show that it is not possible to increase the incomes of employed workers through minimum wage legislation, even under decreasing returns to scale and heterogeneity of ability among workers, unless the welfare support provided to unemployed workers is far below what they would earn in the absence of minimum wages. Moreover, we establish that in the absence of a separate class of agents (i.e. capitalists), minimum wages cannot increase the incomes of employed workers even when there are decreasing returns to scale and no welfare and no welfare support is procided to the unemployed.