Abstract
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.
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