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Minimum wages and poverty with income-sharing

Abstract

Textbook analysis tells us that in a competitive labor market, the introduction of a minimum wage above the competitive equilibrium wage will cause unemployment. This paper makes three contributions to the basic theory of the minimum wage. First, we analyze the effects of a higher minimum wage in terms of poverty rather than in terms of unemployment. Second, we extend the standard textbook model to allow for income-sharing between employed and unemployed persons in society. Third, we extend the basic model to deal with income sharing within families. We find that there are situations in which a higher minimum wage raises poverty, others where it reduces poverty, and yet others in which poverty is unchanged. We characterize precisely how the poverty effect depends on four parameters: the degree of poverty aversion, the elasticity of labor demand, the ratio of the minimum wage to the poverty line, and the extent of income-sharing. Thus, shifting the perspective from unemployment to poverty leads to a considerable enrichment of the theory of the minimum wage.

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Correspondence to Gary S. Fields.

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Fields, G.S., Kanbur, R. Minimum wages and poverty with income-sharing. J Econ Inequal 5, 135–147 (2007). https://doi.org/10.1007/s10888-006-9037-5

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Key words

  • minimum wage
  • poverty
  • unemployment

JEL Codes

  • D6
  • I32
  • J3
  • J64