The Elasticity of Labor Demand and the Minimum Wage

22 Pages Posted: 28 Nov 2007

See all articles by Leif Danziger

Leif Danziger

Ben-Gurion University of the Negev - Department of Economics; IZA Institute of Labor Economics

Date Written: November 2007

Abstract

We show that, contrary to widespread belief, low-pay workers do not generally prefer that the minimum wage rate be increased until the labor demand is unitary elastic. Rather, there exists a critical value of elasticity of labor demand so that increases in the minimum wage rate make low-pay workers better off for higher elasticities, but worse off for lower elasticities. This critical value decreases with unemployment benefits and increases with workers' risk aversion. We also show that in some countries the benefits for long-term unemployed are so low that workers would probably prefer that the minimum wage rate be decreased.

Keywords: elasticity of labor demand, minimum wage

JEL Classification: J38

Suggested Citation

Danziger, Leif, The Elasticity of Labor Demand and the Minimum Wage (November 2007). IZA Discussion Paper No. 3150, Available at SSRN: https://ssrn.com/abstract=1033357

Leif Danziger (Contact Author)

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
8-6472295 (Phone)
8-6472941 (Fax)

HOME PAGE: http://www.econ.bgu.ac.il/facultym/danziger/main.htm

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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