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October 16, 2006

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Jack

Wouldn't any increase in unemployment directly resulting from a minimum wage be offset, at least in part, by looser monetary policy and increased spending by its recipients?

Most of the studies I've seen have been related to local minimum wages in the US where the rest of the economic environment can be assumed not to respond.

Great file name for the Warwick paper.

Ironman

"Wouldn't any increase in unemployment directly resulting from a minimum wage be offset, at least in part, by looser monetary policy and increased spending by its recipients?"

You really couldn't count on monetary policy to wash out the effects of a minimum wage increase on unemployment levels. What's to say that monetary policy wouldn't become tighter instead? It's simply driven by too many other factors.

As for increased spending power, it's kind of a wash. For businesses with minimum-wage earning employees, their options for staying in business with sufficient margins include increasing prices, reducing labor costs (number of employees, hours worked, benefits and, in the long term, shifting labor costs to capital costs, such as through automation.) The latter reduces the need for minimum wage employees in the first place.

Combine those economic forces with the declining numbers of minimum wage earners, and you don't get a lot of impact from hiking the minimum wage.

Don't take my word for it - do the math yourself, and find your own solutions:

http://tinyurl.com/jcdjw

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