CGE models

Predicting the impact of a national minimum wage: are the general equilibrium models up to the task?

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Gilad Isaacs, Servaas Storm on 11 August 2016

This article analyses whether computable general equilibrium (CGE) models are suitable for projecting the likely consequences of implementing a national minimum wage. Referring to modelling exercises undertaken by the National Treasury and the Development Policy Research Unit (DPRU), it shows that their projection of a strongly negative impact on employment and other macroeconomic indicators is a direct result of the architecture and assumptions of these models. By design these models preclude alternative outcomes; this renders them rather unsuitable as guides to policymaking.