Household Labor Supply, Unemployment, and Minimum Wage Legislation
Author(s)
Stiglitz, Joseph E.; Genicot, Garance; Basu, Kaushik
Abstract
Unemployment benefits can, by countering some of the risk of unemployment, neutralize the inefficiencies of households’ tendency to oversupply labor. The supply behavior of labor often depends on the demand conditions prevailing in the labor market. If demand is inadequate, households may send additional household members, who otherwise would not have worked, to look for work, for fear the main income earner may lose his job. Basu, Genicot, and Stiglitz study the theoretical consequences of this “added worker” effect. They show that it can give rise to multiple equilibria in the labor market. Surprisingly, a minimum wage law set below the prevailing market wage can cause the market wage to fall and unemployment to rise. Unemployment benefits, by countering some of the risk of unemployment, can neutralize the inefficiencies caused by households’ tendency to oversupply labor.
