Implications for minimum-wage policies of an S-shaped labor–supply curve

Abstract

A model of family labor supply provides a rationale for raising minimum wages when the labor–supply response is negative at low wages. Under those circumstances, the labor market can be caught in a Malthusian poverty trap of excess supply (unemployment, overextended workdays, child labor) and falling wages. Raising minimum wages may therefore help resorb this excess supply and stabilize the labor market, setting a “virtuous” cycle in motion. In a two-sector context, such a policy would increase wages in both the covered and uncovered sectors. Evidence from a study of Costa Rica, in particular, is consistent with those conclusions.