Dynamic Analysis of the Effect of Minimum Wage on Economic Growth, Public Debt, and Welfare

ABSTRACT This study analyzes the effect of minimum wage on growth and welfare under government debt. We assume minimum wage causes unemployment and that the government finances unemployment benefits via taxes and public debt. This study shows that there is an optimal minimum wage level that maximizes long‐term economic growth, which increases with the ratio of fiscal deficit to GDP. Moreover, the effect of introducing a minimum wage on the welfare of each generation varies across generations. Specifically, the introduction of minimum wage worsens the welfare of future generations but improves that of the initial generation compared to the balanced‐budget rule.