Economic Growth and Welfare in a Neoclassical Overlapping Generations Growth Model with Minimum Wages and Consumption Taxes

We examine the effects of minimum wages on both the long-run per worker GDP and welfare in the textbook Diamond style overlapping generations economy. In addition, we assume the existence of unemployment benefits financed at a balanced budget with consumption taxes. Under suitable conditions, it is shown that a regulated-wage economy with unemployment performs better than a competitive-wage economy with full employment in the long run. Moreover, a welfare-maximizing minimum wage exists. Our findings may have interesting policy implications. Copyright 2010 CEIS, Fondazione Giacomo Brodolini and Blackwell Publishing Ltd.