[Excerpt] I shall refer to minimum wages and other wage-increasing institutions collectively as "wage floors." Throughout the paper, they are assumed to be set in real terms, therefore not be eroded by inflation or devaluation. These wage floors typically are sector-specific: unions are stronger in some firms and industries than in others, minimum wage laws apply to some establishments and localities but not to others and are enforced with different degrees of diligence, and so on. As a stylized version of the differential applicability of wage floors, economists from such disparate fields as development economics, labor economics, and international trade have formulated two-sector models with a wage floor in one sector but not the other. Wage floors would be expected to affect directly the sectors involved and to affect indirectly via migration and other general equilibrium phenomena the other parts of the economy. Among the development variables influenced would be Gross Domestic Product, employment and unemployment, total wages received by labor, income inequality, and poverty.
This paper inquires into the nature of these effects from a theoretical point of view. More specifically, the question considered is:
If a minimum wage or other wage-increasing institution succeeds in establishing a wage floor in the modern sectors of a developing economy, what development effects result?
The analysis developed in the body of the paper leads to the conclusion that the answers are neither clear-cut nor unambiguous. The development effects of wage floors may be positive in some circumstances, negative in others. Simple arguments asserting that wage floors are good (because it's better if workers are paid more) or bad (because wage floors introduce factor price distortions) are shown to be simplistic. The truth is more complicated.