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How Minimum Wages Affect Automation and Innovation in a Schumpeterian Economy

33 Pages Posted: 14 Jun 2021 Publication Status: Preprint

See all articles by Angus C. Chu

Angus C. Chu

Durham Business School

Guido Cozzi

University of St. Gallen - Institute of Economics (FGN)

Haichao Fan

Fudan University - School of Economics

Yuichi Furukawa

Aichi University - Department of Economics

Chih-Hsing Liao

Chinese Culture University

Abstract

This study explores the effects of minimum wage on automation and innovation in a Schumpeterian growth model. We find that raising the minimum wage decreases low-skilled workers' employment and has an ambiguous impact on innovation and automation. Specifically, suppose the substitution elasticity between low-skilled workers and high-skilled workers in production is less (greater) than unity. In that case, raising the minimum wage leads to an increase (a decrease) in automation and innovation. We also provide a quantitative analysis by simulating the effects of minimum wage on the macroeconomy. Finally, we test our theoretical results by estimating the elasticity of substitution between low-skilled and high-skilled workers and the minimum wage impact on automation and innovation in China.

Keywords: minimum wage, unemployment, innovation, automation

JEL Classification: E24, O30, O40

Suggested Citation

Chu, Angus C. and Cozzi, Guido and Fan, Haichao and Furukawa, Yuichi and Liao, Chih-Hsing, How Minimum Wages Affect Automation and Innovation in a Schumpeterian Economy. Available at SSRN: https://ssrn.com/abstract=3866373 or http://dx.doi.org/10.2139/ssrn.3866373

Angus C. Chu

Durham Business School ( email )

Durham
United Kingdom

Guido Cozzi (Contact Author)

University of St. Gallen - Institute of Economics (FGN) ( email )

Bodanstrasse 1
St. Gallen, 9000
Switzerland

Haichao Fan

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Yuichi Furukawa

Aichi University - Department of Economics ( email )

370 Kurozasa, Miyoshi-cho
Nishikamo-gun
Aichi 4700296
Japan

Chih-Hsing Liao

Chinese Culture University

Yaipei, 111
Taiwan

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