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Title:A theory of efficiency wage with multiple unemployment equilibria: how a higher minimum wage law can curb unemployment PDF Logo
Authors:Basu, Kaushik
Felkey, Amanda J.
Issue Date:2008
Series/Report no.:IZA Discussion Papers 3381
Abstract:This paper uses efficiency wage theory and the existence of community-based sharing to hypothesize that labor markets in developing countries have multiple equilibria - the same economy can be stuck at different levels of unemployment with different levels of wages. The model is meant for developing economies where wage-productivity links are discernible and income-sharing among the poor is prevalent. It seems reasonable to posit that in such an economy more unemployment leads to more income sharing. The main results are generated combining this claim with a theoretical demonstration of the fact that more sharing increases unemployment rates. As corollaries, we show that (1) within the same society, two different racial groups that may be ex ante identical can have different levels of unemployment and wages in equilibrium and (2) the imposition of a legal minimum wage can raise employment.
Subjects:Unemployment
efficiency wage
minimum wage law
racial differences
South Africa
JEL:J60
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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