How Minimum Wages Affect Automation and Innovation in a Schumpeterian Economy

This study explores the effects of minimum wage on automation and innovation in a Schumpeterian growth model. We find that raising the minimum wage decreases low-skilled workers' employment and has an ambiguous impact on innovation and automation. Specifically, suppose the substitution elasticity between low-skilled workers and high-skilled workers in production is less (greater) than unity. In that case, raising the minimum wage leads to an increase (a decrease) in automation and innovation. We also provide a quantitative analysis by simulating the effects of minimum wage on the macroeconomy. Finally, we test our theoretical results by estimating the elasticity of substitution between low-skilled and high-skilled workers and the minimum wage impact on automation and innovation in China