USBIGDiscussionPaperNo.77,February2004.docVIP

USBIG Discussion Paper No. 77, February 2004 Work in progress, do not cite or quote without author’s permission On the Welfare Effects of a Wage Floor in a Two-Sector Labor Market with Impoverished Workers Dr. David L. Wetzell* Abstract That a wage floor, such as the minimum wage, lowers employment has been extensively empirically confirmed. However, among poorer workers the relatively inelastic nature of labor demand may permit an increase in the minimum wage to have a positive wage spill-over into the uncovered sector if covered sector employees need to moon-light in the uncovered sector is reduced. The model indicates that wage floors may be a more appropriate instrument for reducing poverty when workers are impoverished and also affirms the need to empirically test for their impact on the income and hours worked by directly and indirectly affected workers. Introduction. The following is an “ideal-type” situation where a wage floor, such as a minimum wage or a living wage, may be justified despite how it causes a reduction in the level of employment in the covered sector. As with Mincer(1976), the model considers that displaced workers will be able to find work in the uncovered sector. Unlike Mincer (1976), the model abstracts from unemployment or search for covered-sector jobs and, instead, allows employed workers to supplement their income by “moon-lighting” in the uncovered or informal sector. Also, unlike Mincer (1976), the model derives labor-supply directly from utility-maximizing labor supply decision. For simplicity, it is assumed that the hours of workers employed in the covered sector are determined exogenously by work-week restrictions. As such, the relevant choice is the time supplied to the uncovered sector. It is also assumed that workers are poor and that, as shown in Wetzell(2001), “leisure” requires money or purchasable inputs. Here, the difference between consumption and leisure is that leisure consists of more time-intensive activit