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Documento de trabajo

The Grasshopper, the Ant, and the Minimum Wage

  • person Alexandre Janiak

    Jonathan Rojas Hepburn

  • class Documento de Trabajo IE-PUC, N° 570, 2023

Abstract: We study the macroeconomic impact of raising the minimum wage on the labor market and the distribution of wealth, with particular emphasis on the presence of labor market risk and how the minimum wage can potentially shape such risk. Building on the empirical observation of substantial wealth heterogeneity among minimum-wage workers, we set up a model with uninsurable idiosyncratic income risk, search frictions, and Nash bargaining. Our quantitative exercises suggest important non linearities on the impact of minimum-wage increases on the wealth distribution: while a moderate increase has little effect on job creation, slightly compresses the wage distribution, and exerts little impact on the distribution of wealth, a larger increase can have a non-negligible labor-market impact and generate more wealth inequality. This latter effect is mainly due to the enhancement of precautionary-savings motives among richer workers caused by the increased risk of job separation, which becomes stronger for wealthier individuals likely to earn the minimum wage in the future. We show that this precautionary-savings channel is quantitatively more important than the more traditional inequality channel, according to which wealth inequality rises because the fraction of the population earning a wage falls.