Aggregate Effects of Minimum Wage Regulation at the Zero Lower Bound

The Fair Minimum Wage Act of 2007 increased the U.S. nominal minimumwage by 41 percent, just as interest rates hit the Zero LowerBound. I study the interaction of these events in a parsimonious extensionof the sticky-price New Keynesian model with heterogeneous labor.A “minimum-wage augmented” Phillips curve relates inflation to outputand the real minimum wage, which I estimate with aggregate data.Consistent with theory, controlling for the real minimum wage reducesthe effect of output on inflation and increasing the minimum wage isinflationary. I then calibrate the equilibrium model to match microeconomicelasticities of earnings with respect to the minimum wage. Onaggregate, the ZLB's contractionary effects are dampened because nominalwages cannot decline rapidly, thereby halting the deflationary spiralcaused by low aggregate demand. The effect can be large - in the calibratedeconomy, GDP losses from the ZLB are cut by half, even thoughonly 3% of earnings accrue to minimum wage earners. Furthermore,increasing the minimum wage at the ZLB is expansionary, generatingexpected accumulated output gains of 14%