NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effect of Minimum Wage Legislation on Income Equality: A TheoreticalAnalysis

J. Huston McCulloch

NBER Working Paper No. 171
Issued in March 1977

Minimum wage legislation is frequently advocated in the belief that itcreates a more nearly equal distribution of income. A one-sector model of general equilibrium is used to analyze a universally applicable minimum wage, and a two-sector model is used to analyze a minimum wage that is only applied to certain industries. In both cases we find that a minimum wage may well lower equality (as computed by the Gini index) if we consider reasonable values for the parameters of these two models. In the absence of unemployment compensation, equality can increase only if the elasticity of substitution in production is quite low. In the one-sector case, however, equality necessarily rises if unemployment compensation is present and sufficiently generous.

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Document Object Identifier (DOI): 10.3386/w0171

Published: (Published as "The Effect of a Minimum Wage Law in the Labour-Intensive Sector") Canadian Journal of Economics, Vol. 7, no. 2 (1974): 316-318.

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