How Do We Know That Real Wages Are Too High?

It is a common belief that the existence of involuntary unemployment implies that wages are too high and that wage moderation should be encouraged as a way to keep unemployment down. This paper argues for a reconsideration of this view by showing that it is possible for a binding minimum wage to reduce unemployment or increase employment even if there is involuntary unemployment. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.