On Artificial Structural Unemployment and Endogenous Minimum Wage

Abstract

We construct a novel model of equilibrium unemployment. Specifically, in a dynamic micro based model, we illustrate that rational and profit maximizing firms can choose to pay wages that exceed the market clearing level to restrict competition. Resulting unemployment and above market clearing wages are both shown to be a part of equilibrium and to persist idifinitely. In addition, we provide a new rationale for the prevalence of minimum wage legislation in most economies. In particular, we show that minimum wage regulation can be be universally favored by all producers while being resnted by employees.