We consider an economy (e.g., Chile 1973-83 or modern Turkey) with a minimum wage sector and a free sector and a tax on labor earnings. We ask can a minimum wage hike raise employment and economic efficiency?

In an overlapping generations model, capital and labor produce two tradeable goods. A kleptocratic government spends the tariff revenue. Trade liberalization benefits the retired generation if and only if the relative price of the capital intensive good rises. Starting from autarky, a small...