Minimum Wage, Credit Rationing and Unemployment in a Monetary Economy

The aim of this paper is to analyse the theoretical links between minimum wagelegislation and the level of employment in the theoretical framework of the monetary theory of production (MTP) in which the “high-wage effect” operates under the constraint of credit rationing at the expense of small firms. It will show that a rise in wages via externalintervention, and particularly by means of a minimum wage law, induces firms to accumulatemore capital and that this has a positive effect on the level of employment, thus going counter to the mainstream view that labour market deregulation generates positive outcomes. Moreover it will show that the “high-wage effect” can solve the paradox of profits in the MTPowing to bankruptcies of firms facing credit rationing.