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What Happens When the Minimum Wage Rises? It Depends on Monetary Policy

Author

Listed:
  • Andrew Glover
  • Jose Mustre-del-Rio

Abstract

Andrew Glover and José Mustre-del-Río examine how monetary policy may amplify or dampen the response of employment and inflation to an increase in the minimum wage. Their model-based analysis suggests a minimum wage increase has expansionary effects on the economy if the central bank is relatively unresponsive to current inflation, and contractionary effects if the central bank responds more aggressively (more than one-for-one) to current inflation. More generally, their framework suggests that if an increase in the minimum wage engenders contractionary effects, the central bank can mitigate these effects by allowing inflation to rise by more than the nominal interest rate.

Suggested Citation

  • Andrew Glover & Jose Mustre-del-Rio, 2021. "What Happens When the Minimum Wage Rises? It Depends on Monetary Policy," Economic Review, Federal Reserve Bank of Kansas City, vol. 106(no.3), pages 5-24, September.
    • Handle: RePEc:fip:fedker:93111
    DOI: 10.18651/ER/v106n3GloverMustredelRio
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    References listed on IDEAS

    as
    1. Gauti B. Eggertsson, 2012. "Was the New Deal Contractionary?," American Economic Review, American Economic Association, vol. 102(1), pages 524-555, February.
    2. Johannes F. Wieland, 2019. "Are Negative Supply Shocks Expansionary at the Zero Lower Bound?," Journal of Political Economy, University of Chicago Press, vol. 127(3), pages 973-1007.
    3. David Neumark & Peter Shirley, 2022. "Myth or measurement: What does the new minimum wage research say about minimum wages and job loss in the United States?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 61(4), pages 384-417, October.
    4. Daniel Aaronson, 2001. "Price Pass-Through And The Minimum Wage," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 158-169, February.
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    More about this item

    Keywords

    Minimum Wage; Monetary Policy; Inflation;
    All these keywords.

    JEL classification:

    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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