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Household labor supply, unemployment, and minimum wage legislation

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Author Info
Basu, Kaushik
Genicot, Garance
Stiglitz, Joseph E.

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Abstract

The supply behavior of labor often depends on the demand conditions prevailing in the labor market. If demand is inadequate, households may send additional household members, who otherwise would not have worked, to look for work, for fear the main income earner may lose his job. The authors study the theoretical consequences of this"added worker"effect. They show that it can rise to multiple equilibria in the labor market. Surprisingly, a minimum wage law set below the prevailing market wage can cause the market wage to fall and unemployment to rise. Unemployment benefits, by countering some of the risks of unemployment, can neutralize the inefficiencies caused by households'tendency to oversupply labor.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2049.

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Date of creation: 28 Feb 1999
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Handle: RePEc:wbk:wbrwps:2049

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Related research
Keywords: Economic Theory&Research; Labor Policies; Health Economics&Finance; Labor Markets; Environmental Economics&Policies; Health Economics&Finance; Labor Markets; Access to Markets; Environmental Economics&Policies; Economic Theory&Research;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Schlicht, Ekkehart, 1978. "Labour Turnover, Wage Structure, and Natural Unemployment," Discussion Papers in Economics 1255, University of Munich, Department of Economics. [Downloadable!]
  2. Basu, Kaushik & Van, Pham Hoang, 1998. "The Economics of Child Labor," American Economic Review, American Economic Association, vol. 88(3), pages 412-27, June.
  3. Layard, R & Barton, M & Zabalza, A, 1980. "Married Women's Participation and Hours," Economica, London School of Economics and Political Science, vol. 47(185), pages 51-72, February. [Downloadable!] (restricted)
  4. Kaushik Basu, 1999. "Child Labor: Cause, Consequence, and Cure, with Remarks on International Labor Standards," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1083-1119, September. [Downloadable!] (restricted)
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  5. Fleisher, Belton M & Rhodes, George, 1976. "Unemployment and the Labor Force Participation of Married Men and Women: A Simultaneous Model," The Review of Economics and Statistics, MIT Press, vol. 58(4), pages 398-406, November. [Downloadable!] (restricted)
  6. Flinn, Christopher J & Heckman, James J, 1983. "Are Unemployment and Out of the Labor Force Behaviorally Distinct Labor Force States?," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 28-42, January. [Downloadable!] (restricted)
    Other versions:
  7. Greenwald, Bruce C & Stiglitz, Joseph E, 1995. "Labor-Market Adjustments and the Persistence of Unemployment," American Economic Review, American Economic Association, vol. 85(2), pages 219-25, May.
  8. Ashenfelter, Orley, 1980. "Unemployment as Disequilibrium in a Model of Aggregate Labor Supply," Econometrica, Econometric Society, vol. 48(3), pages 547-64, April. [Downloadable!] (restricted)
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  9. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  10. Stiglitz, Joseph E, 1976. "The Efficiency Wage Hypothesis, Surplus Labour, and the Distribution of Income in L.D.C.s," Oxford Economic Papers, Oxford University Press, vol. 28(2), pages 185-207, July. [Downloadable!] (restricted)
  11. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-42, March. [Downloadable!] (restricted)
  12. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages S87-104, August. [Downloadable!] (restricted)
  13. Stiglitz, Joseph E, 1974. "Alternative Theories of Wage Determination and Unemployment in LDC'S: The Labor Turnover Model," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 194-227, May. [Downloadable!] (restricted)
  14. Lundberg, Shelly, 1985. "The Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 11-37, January. [Downloadable!] (restricted)
  15. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September. [Downloadable!] (restricted)
  16. Fortin, Bernard & Lacroix, Guy, 1997. "A Test of the Unitary and Collective Models of Household Labour Supply," Economic Journal, Royal Economic Society, vol. 107(443), pages 933-55, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pieter Serneels, 2004. "The Nature of Unemployment in Urban Ethiopia," Development and Comp Systems 0409042, EconWPA. [Downloadable!]
  2. Pieter Serneels, 2004. "The Added Worker Effect and Intrahousehold Aspects of Unemployment," Development and Comp Systems 0409014, EconWPA. [Downloadable!]
  3. Jason Furman & Joseph E. Stiglitz, 1998. "Economic consequences of income inequality," Proceedings, Federal Reserve Bank of Kansas City, pages 221-263. [Downloadable!]
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