82nd International Atlantic Economic Conference

October 13 - 16, 2016 | Washington, USA

Macroeconomic consequences of the minimum wage: Results from the social architecture model

Saturday, October 15, 2016: 2:35 PM
Alan G. Isaac, Ph.D. , Economics, American University, Washington, DC
Due to concerns about rising inequality and desires to reduce poverty, raising the minimum wage has once again become a prominent policy proposal.  Stigler (1946) lauded the goal of poverty reduction but argued that minimum wage legislation is ineffective in achieving it.  We re-examine some of Stigler’s arguments in a simple agent-based macromodel.

Agent-based methods are particularly suitable for examining the distributional consequences of policy.  Agents can have heterogeneous characteristics that can evolve over time.  For example, some agents may be employers, some may be employed, and some may be unemployed.  This status can change over time in response to both the local (microeconomic) and global (macroeconomic) state of the economy.  A minium wage can affect hiring dynamics, and this can affect household employment status and earning in idiosyncratic ways.

Among the simplest agent-based models are the econophysics models.  These strive to minimize the dependence of model outcomes on the peculiarities of specific economic theories, favoring instead mild distributional assumptions on behavior subject to uncontroversial constraints (such as budget constraints). Particulary famous instances of this approach are the zero-intelligence traders of Becker (1962) and Gode and Sunder (1993).

Econophysics meets macroeconomics in the social architecture model of Wright (2009).  In the tradition of zero-intelligence agents, the social architecture model generates macroeconomic outcomes from the implicit microfoundations of many weakly coordinated agents constrained by their institutional structure.  We add to this model a new institution: a legal minimum wage.  We explore four issues about the minimum wage that were raised by Stigler: the consequences for resource allocation, the consequences for aggregate employment, the effects on family income, and the availability of alternative policies that address the same goals.  We also explore how the introduction of a legal minimum thus affects the SA model's ability to generate empirical distributions typical of capitalist economies.