Are the regulation of wages and unemployment always detrimental for economic growth

Abstract

Although the debate about the effects of the regulation of wages is long lasting, little attention has been paid to the role played by minimum wages in inter-temporal contexts with endogenous fertility. This paper investigates such effects within a standard OLG model of neoclassical growth. Some new results, so far escaped closer scrutiny, emerge: introducing a regulated wage may, despite the unemployment occurrence, (i) have a favourable impact on both capital accumulation and output per capita; (ii) reduce the population growth rate. This occurs more likely when a sufficiently high capital share as well as significant unemployment benefits do coexist. Moreover we show that such results also hold even with exogenous fertility and lump-sum taxation on the elderly. Therefore, we conclude that under suitable conditions the Stigler's (1946) result that the regulation of wages always causes a production loss may be violated, that is, in a dynamical context a regulated-wage economy may perform better than a market-wage economy, and the higher is the unemployment rate the higher is the (neoclassical) economic growth. Furthermore, we argue that the minimum wage may also be treated as a policy parameter to control population growth.