How Minimum Wages Affect Automation and Innovation in a Schumpeterian Economy

Abstract

This study explores the e¤ects of minimum wage on automation and innovation in a Schumpeterian growth model. We …nd that raising the minimum wage decreases the employment of low-skill workers and has ambiguous e¤ects on innovation and automation. Speci…cally, if the elasticity of substitution between low-skill workers and high-skill workers in production is less (greater) than unity, then raising the minimum wage leads to an increase (a decrease) in automation and innovation. We also provide a quantitative analysis by simulating the e¤ects of minimum wage on the macroeconomy. Finally, we test our theoretical results by estimating the elasticity of substitution between low-skill workers and high-skill workers and the e¤ects of minimum wage on automation and innovation in China.