Dynamic effects of minimum wage on growth and innovation in a Schumpeterian economy

We explore the dynamic effects of minimum wage in a Schumpeterian model with endogenous market structure and obtain the following results. First, raising the minimum wage decreases the employment of low-skill workers and increases the unemployment rate. Second, it decreases the level of output. Thir...

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Bibliographic Details
Published in:Economics letters 2020-03, Vol.188, p.108943, Article 108943
Main Authors: Chu, Angus C., Kou, Zonglai, Wang, Xilin
Format: Article
Language:English
Subjects:
Economic development
Employment
Endogenous
Endogenous market structure
Growth rate
Innovation
Innovations
Labor market
Market structure
Minimum wage
Quantitative analysis
Unemployment
Wages & salaries
Workers
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Summary:We explore the dynamic effects of minimum wage in a Schumpeterian model with endogenous market structure and obtain the following results. First, raising the minimum wage decreases the employment of low-skill workers and increases the unemployment rate. Second, it decreases the level of output. Third, it decreases the transitional growth rate of output but does not affect the steady-state growth rate. Our quantitative analysis shows that the magnitude of the negative effects of minimum wage is sharply increasing in low-skill labor intensity in production and that employed low-skill workers gain initially but might suffer from slower growth in future wages. •We consider minimum wage in a Schumpeterian model with endogenous market structure.•Minimum wage reduces low-skill employment and increases the unemployment rate.•Minimum wage reduces the transitional growth rate but not the steady-state growth rate.•The negative effect of minimum wage is increasing in low-skill labor intensity.•Employed low-skill workers gain initially but might face slower growth in wages.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2020.108943