The Elasticity of Labor Demand and the Optimal Minimum Wage

11 Pages Posted: 21 Oct 2006

See all articles by Leif Danziger

Leif Danziger

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

Date Written: October 2006

Abstract

Contrary to widespread belief, we show that low-pay workers might not generally prefer that the minimum wage rate be increased to a level where the labor demand is unitary elastic. Rather, there exists a critical value of elasticity of labor demand such that increases in the minimum wage rate make low-pay workers better off for higher elasticities, but worse off for lower elasticities. We demonstrate that the critical value decreases with the workers' income-equivalent wage rate and increases with their risk aversion. It is also shown that there may not exist an optimal minimum wage rate, and if it does exist, may not be unique.

Keywords: elasticity of labor demand, minimum wage, competitive labor market

JEL Classification: J38

Suggested Citation

Danziger, Leif, The Elasticity of Labor Demand and the Optimal Minimum Wage (October 2006). IZA Discussion Paper No. 2360, Available at SSRN: https://ssrn.com/abstract=939008

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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