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Employment cycles, low income work and the dynamic impact of wage regulations. A macro perspective

Abstract:

In this paper we investigate, against the background of Goodwin's (1967) growth cycle model, a dual labor market economy and the consequences of introducing an unemployment benefit system and minimum wages in the second labor market and a maximum wage barrier in the first one. In the framework with free 'hiring' and firing' in the both labor markets we show (a) that in fact maximum real wages in the first labor market not only reduce the volatility of this labor market, but also provide global stability to the system dynamics if they are locally explosive, and (b) that larger fluctuations in employment can be made (at least partially) socially acceptable through a (workfare oriented) unemployment benefit system augmented by minimum wage in the low income segment of the labor market. © 2011 Springer-Verlag.