Theory and Evidence on the Political Economy of the Minimum Wage

Abstract

This paper examines how closely the minimum wage has been set to the most popularly stated goals of minimun‐wage policy. I first estimate these goals: the minimum‐wage rate at which the relevant labor demand is unitary elastic‐maximizing the total earnings of minimum‐wage workers (about $5.35)‐and the level that would lift a typical minimum‐wage worker's family out of poverty (about $5.17). I can reject that the actual minimum‐wage policy has been driven by desire to achieve these goals and find that a simple interest group model best explains the historical path of the minimum‐wage rate.