Minimum Wage, Credit Rationing and Unemployment in a Monetary Economy

Abstract

The aim of this paper is to analyse the theoretical links between minimum wage legislation and the level of employment in the theoretical framework of the monetary theory of production (MTP) in which the high-wage effect operates under the constraint of credit rationing at the expense of small firms. It will show that a rise in wages via external intervention, and particularly by means of a minimum wage law, induces firms to accumulate more capital and that this has a positive effect on the level of employment, thus going counter to the mainstream view that labour market deregulation generates positive outcomes. Moreover it will show that the high-wage effect can solve the paradox of profits in the MTP owing to bankruptcies of firms facing credit rationing.