Minimum wage, trade and unemployment in general equilibrium

• Date: 01 March 2021
• DOI: http://doi.org/10.1111/ijet.12264
• Author: Shrimoyee Ganguly,Sugata Marjit,Rajat Acharyya
• Published date: 01 March 2021

Int J Econ Theory. 2021;17:74–87.wileyonlinelibrary.com/journal/ijet74

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© 2020 IAET

DOI: 10.1111/ijet.12264

ORIGINAL ARTICLE

Minimum wage, trade and unemployment

in general equilibrium

Sugata Marjit

1,2,3

|Shrimoyee Ganguly

4

|Rajat Acharyya

4

1

Indian Institute of Foreign Trade, India

2

Centre for Training and Research in Public

Finance and Policy, India

3

CES_Ifo, Munich, Germany

4

Department of Economics, Jadavpur

University, India

Correspondence

Sugata Marjit, Indian Institute of Foreign

Trade, 1583 Madurdaha, Chowbagha Road,

Kolkata 700107, India.

Email: marjit@gmail.com

Abstract

The path‐breaking work of Card and Krueger,

showing that a higher minimum wage can increase

employment, turned the age‐old conventional wis-

dom on its head. This paper demonstrates that this

apparently paradoxical result is perfectly plausible in

a competitive general equilibrium production struc-

ture of a small open economy with a non‐traded

good, without recourse to monopsony, spatial het-

erogeneity, heterogeneity of consumers and so on, the

usual theoretical drivers behind the result. Following

Jones and Marjit, we build a simple general equili-

brium model with production complementarity and

we show that a higher minimum wage can raise ag-

gregate employment. Expansion in the non‐traded

sector following a wage hike may be consistent with

the overall expansion of the export sector in a multi‐

good framework, an unlikely outcome in a conven-

tional two‐good model which cannot accommodate

with production complementarity.

KEYWORDS

employment, minimum wage, non‐traded good

JEL CLASSIFICATION

J2; J3; F11; F16

This paper is my (SM) humble tribute to Ron Jones, my teacher, mentor and long time collaborator. We are indebted to

an anonymous referee for helpful comments. The usual disclaimer applies.