Determinants of collateral

Abstract

This paper addresses the unresolved debate on the effects of minimum wages on output, employment, and income inequality by modeling an occupational choice economy calibrated for a representative OECD economy. The minimum wage sets a minimum skill requirement for employees, which reduces the effective labor supply and raises its price. Consequently, salaries increase, business profits fall, and some entrepreneurs transition to solo self-employment. With a minimum-to-average wage ratio of 0.43 (the OECD countries average in 2020), a 10% increase in the minimum wage reduces output, employment, and inequality among employees by 0.2%, 1.0%, and 2.1%, respectively, and increases total income inequality by 0.57%. If the minimum-to-average wage ratio were 0.55, output, employment, and inequality among employees would decrease by 0.87%, 3.55%, and 5.19%, respectively, and income inequality would rise by 2.09%. In summary, the effects are mainly negative, contrary to what is promised, and quantitatively large for high minimum-to-average wage ratios.