Reducing the race to the bottom: A primer on a global floor for minimum wages

Abstract

A “race towards the bottom” in very poor countries is a policy that deliberately depresses wages to attain higher competitiveness in the global market. This policy distorts the comparative advantages that would emerge in the absence of such an economic policy and also induces lower purchasing power, leading to suboptimal consumption. There are barely any theoretical models (to our knowledge) showing the impact of a global minimum for minimum wages. We found that, under such circumstances, a global lower bound for minimum wages that re-establishes the competitive wage rate in very poor countries represents a Pareto improvement: It enhances the markets due to the expansion in sales caused by the increase in real wages of the vast majority (workers). One of the innovations of this primer is to apply a simple dsge model to the macroeconomic consequences of a global minimum for minimum wages.