Real Minimum Wage and Growth Theory: Simulations and Some Policy Results

A Solow type two-sector growth model is used to examine several issues related to growth and unemployment in a minimum wage economy. By simulating the model, we demonstrate that given the same percentage increase in wage rate, an economy with a higher capital-labor ratio is more likely to decay. More importantly, a tariff policy reduces the unemployment periods by 92% provided that the current capital-labor ratio is one-sixth of that of the steady state capital-labor ratio. We assume that the first best policy of uniform wage subsidy is not politically feasible.