Household Labor Supply, Unemployment, and Minimum Wage Legislation

35 Pages Posted: 20 Apr 2016

See all articles by Joseph E. Stiglitz

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Garance Genicot

Georgetown University - Department of Economics

Kaushik Basu

Cornell University - Department of Economics; IZA Institute of Labor Economics; Brookings Institution

Date Written: December 1998

Abstract

When - to cover the risk of underemployment - households oversupply labor to a labor market in which demand is down, a minimum wage set below the prevailing market wage can send the market wage down and unemployment up. Unemployment benefits can, by countering some of the risk of unemployment, neutralize the inefficiencies of households' tendency to oversupply labor.

The supply behavior of labor often depends on the demand conditions prevailing in the labor market. If demand is inadequate, households may send additional household members, who otherwise would not have worked, to look for work, for fear the main income earner may lose his job. Basu, Genicot, and Stiglitz study the theoretical consequences of this added worker effect. They show that it can give rise to multiple equilibria in the labor market.

Surprisingly, a minimum wage law set below the prevailing market wage can cause the market wage to fall and unemployment to rise.

Unemployment benefits, by countering some of the risk of unemployment, can neutralize the inefficiences caused by households' tendency to oversupply labor.

This paper - a product of the Office of the Senior Vice President, Development Economics - is part of a larger effort in the Bank to understand unemployment and examine alternative labor market policies. Kaushik Basu may be contacted at kbasu@worldbank.org.

Suggested Citation

Stiglitz, Joseph E. and Genicot, Garance and Basu, Kaushik, Household Labor Supply, Unemployment, and Minimum Wage Legislation (December 1998). World Bank Policy Research Working Paper No. 2049. Available at SSRN: https://ssrn.com/abstract=620651

Joseph E. Stiglitz (Contact Author)

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Garance Genicot

Georgetown University - Department of Economics ( email )

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HOME PAGE: http://www.georgetown.edu/faculty/gg58

Kaushik Basu

Cornell University - Department of Economics ( email )

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607-255-2818 (Fax)

IZA Institute of Labor Economics

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Bonn, D-53072
Germany

Brookings Institution ( email )

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