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Minimum wage, firm dynamics, and wage inequality: Theory and evidence​

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  • Chi‐Chur Chao
  • Mong Shan Ee
  • Xuan Nguyen
  • Eden S. H. Yu

Abstract

This paper investigates the distributive and welfare impacts of increasing minimum wage in an economy with imperfect competition. In the short run without entry/exit of manufacturing firms, an increase in the urban minimum wage reduces the skilled–unskilled wage gap but worsens unemployment and welfare in the economy. In the long run, a higher minimum wage induces firms to exit the urban manufacturing sector, thereby releasing capital to the rural agricultural sector. This can yield double dividends by further narrowing wage inequality and improving social welfare. Empirical results based on data from 43 selected countries confirm our theoretical findings.

Suggested Citation

  • Chi‐Chur Chao & Mong Shan Ee & Xuan Nguyen & Eden S. H. Yu, 2022. "Minimum wage, firm dynamics, and wage inequality: Theory and evidence​," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(3), pages 247-271, September.
    • Handle: RePEc:bla:ijethy:v:18:y:2022:i:3:p:247-271
    DOI: 10.1111/ijet.12307
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