Minimum Wages, Human Capital and Growth

Abstract

This chapter focuses on the effect of a minimum wage on steady state economic growth and steady state employment. As in the model presented in chapter five, we stress the importance of human capital, but we focus on economic dynamics and use the setup of an infinite horizon model based on Lucas (1988). Differences to the static model are that human and “physical capital” can be accumulated over time, and that “infinitely living” households maximize their lifetime (“dynastic”) utility subject to intertemporal budget constraints. In contrast to Lucas’s original model, the households must decide on the optimal use of labor, leisure and educational time.¹