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The macroeconomics of the minimum wage

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  • Šauer, Radek

Abstract

This paper studies the macroeconomic impact of a statutory minimum wage. I demonstrate by means of a medium-scale DSGE model, which I estimate with US data, how the minimum wage impacts aggregate variables. The model framework enables me to take into account various general-equilibrium effects that the minimum wage can potentially trigger. Under the estimated stance of monetary policy, the model predicts that the minimum wage has a negligible effect on the macroeconomy. However, if the Federal Reserve conducted highly dovish monetary policy, the federal minimum wage would substantially affect the macroeconomy. A minimum-wage hike would even cause an economic expansion. The paper also examines the possibility of indexing the minimum wage to an inflation measure. It compares the indexation to price inflation with the indexation to wage inflation. By considering an alternative estimated model, I present evidence that performance standards are an important adjustment channel through which firms react to changes in the minimum wage.

Suggested Citation

  • Šauer, Radek, 2018. "The macroeconomics of the minimum wage," Journal of Macroeconomics, Elsevier, vol. 56(C), pages 89-112.
    • Handle: RePEc:eee:jmacro:v:56:y:2018:i:c:p:89-112
    DOI: 10.1016/j.jmacro.2018.01.003
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    More about this item

    Keywords

    Minimum wageMacroeconomyUnemploymentEffortMonetary policy;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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