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Optimal Fiscal Policy with Rationing in the Labor Market

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  • Gorostiaga Arantza

    ()
    (Universidad del Pais Vasco)

Abstract

This paper studies the implications for the optimal policy of introducing an exogenous minimum wage into a standard public finance model. I present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor income taxes and debt. I find that for sufficiently high minimum wages, equilibria in which the labor supply is rationed and involuntary unemployment arises may be optimal in bad times. For a minimum wage not too high, the government will set taxes to reduce the labor supply and avoid non desirable rationing. This implies increasing taxes in bad times. As regards the cyclical properties of the optimal policy, state contingent returns on debt are used as shock absorbers so as to smooth private consumption over time and across states of nature.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 5 (2005)
Issue (Month): 1 (July)
Pages: 1-22

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Handle: RePEc:bpj:bejmac:v:topics.5:y:2005:i:1:n:17

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  1. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
  2. Kydland, Finn E. & Prescott, Edward C., 1980. "Dynamic optimal taxation, rational expectations and optimal control," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 79-91, May.
  3. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  4. V.V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Proceedings, Federal Reserve Bank of Cleveland, pages 519-546.
  5. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
  6. Arantza Gorostiaga, 2002. "Should Fiscal Policy Be Di.erent in a Non-Competitive Framework?," Economic Working Papers at Centro de Estudios Andaluces E2002/11, Centro de Estudios Andaluces.
  7. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
  8. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  9. Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, vol. 48(2), pages 283-306, March.
  10. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
  11. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August.
  12. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August.
  13. Pissarides, Christopher A, 1989. "Unemployment and Macroeconomics," Economica, London School of Economics and Political Science, vol. 56(221), pages 1-14, February.
  14. Gorostiaga Alonso, Miren Arantzazu, 1999. "Should Fiscal Policy be different in a Non-Competitive Framework?," DFAEII Working Papers 2002-28, University of the Basque Country - Department of Foundations of Economic Analysis II.
  15. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc.
  16. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
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Cited by:
  1. Steven Cassou & Arantza Gorostiaga & María Gutiérrez & Stephen Hamilton, 2010. "Second-best tax policy and natural resource management in growing economies," International Tax and Public Finance, Springer, vol. 17(6), pages 607-626, December.
  2. Gorostiaga, Arantza & Rubio-Ramirez, Juan F., 2007. "Optimal minimum wage in a competitive economy: An alternative modelling approach," Economic Modelling, Elsevier, vol. 24(5), pages 778-796, September.
  3. Cassou, Steven P. & Hamilton, Stephen F. & Gorostiaga Alonso, Miren Arantzazu & Gutiérrez Huerta, María José, 2006. "Second-best tax policy in a growing economy with externalities," DFAEII Working Papers 2006-03, University of the Basque Country - Department of Foundations of Economic Analysis II.
  4. Arantza Gorostiaga & Juan Francisco Rubio-Ramírez, 2004. "Optimal minimum wage in a competitive economy," Working Paper 2004-30, Federal Reserve Bank of Atlanta.
  5. Gorostiaga Alonso, Miren Arantzazu & Cassou, Steven P., 2007. "Optimal fiscal policy in a multisector model with minimum expenditure requirements," DFAEII Working Papers 2007-01, University of the Basque Country - Department of Foundations of Economic Analysis II.

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