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A minimum wage can be welfare-improving and employment-enhancing

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  • Boadway, Robin
  • Cuff, Katherine

Abstract

We examine whether minimum wages can fulfill a useful role as part of an optimal non-linear income tax scheme. In this setting, governments cannot observe household abilities, only their incomes. Redistributing according to income, the government is constrained by a set of incentive constraints. Firms, on the other hand, are able to identify abilities of workers. To exploit that, the government imposes a minimum wage. This will preclude firms from offering a job to anyone below the minimum wage. The use of the minimum wage policy combined with the institutional features of typical welfare systems allows the incentive constraints to be severed at the ability level associated with the minimum wage. If such a scheme can be enforced, the government can increase the amount of redistribution from those working to those not working. Moreover, the optimal minimum wage may actually lower the number of unemployed. Nous étudions la possibilité qu'un salaire minimum soit une composante utile d'un système de taxation non-linéaire optimale du revenu. Dans un tel cadre, les gouvernements observent le revenu des individus, mais pas leur habileté. La redistribution ne pouvant dépendre que du revenu, le gouvernement est contraint par un ensemble de contraintes d'incitation. Les firmes peuvent par ailleurs observer les habiletés des travailleurs. Afin d'exploiter ce dernier fait, le gouvernement impose un salaire minimum. La mise en place d'un salaire minimum, étant donné les caractéristiques institutionnelles des systèmes d'aide sociale habituels, permet de relâcher la contrainte d'incitation des individus ayant une habilité égale au salaire minimum. Si un tel système peut être mis en vigueur, le gouvernement peut accroître l'ampleur de la redistribution de ceux qui travaillent vers ceux qui ne travaillent pas. De plus, il est possible que le salaire minimum optimal diminue le nombre de chômeurs.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 45 (2001)
Issue (Month): 3 (March)
Pages: 553-576

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Handle: RePEc:eee:eecrev:v:45:y:2001:i:3:p:553-576

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Web page: http://www.elsevier.com/locate/eer

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  1. Robin Boadway & Katherine Cuff & Maurice Marchand, 1999. "Optimal Income Taxation With Quasi-Linear Preferences Revisited," Working Papers 984, Queen's University, Department of Economics.
  2. Guesnerie, Roger & Roberts, Kevin, 1984. "Effective Policy Tools and Quantity Controls," Econometrica, Econometric Society, vol. 52(1), pages 59-86, January.
  3. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May.
  4. Marhuenda, Francisco & Ortuno-Ortin, Ignacio, 1997. " Tax Enforcement Problems," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(1), pages 61-72, March.
  5. BOADWAY, Robin & MARCHAND, Maurice & SATO, Motohiro, . "Subsidies versus public provision of private goods as instruments for redistribution," CORE Discussion Papers RP -1355, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Robin Boadway & Katherine Cuff, 1999. "Monitoring Job Search as an Instrument For Targeting Transfers," International Tax and Public Finance, Springer, vol. 6(3), pages 317-337, August.
  7. Boadway, R. & Marchand, M., . "The use of public expenditures for redistributive purposes," CORE Discussion Papers RP -1131, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695, December.
  9. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October.
  10. Swinnerton, Kenneth A, 1996. "Minimum Wages in an Equilibrium Search Model with Diminishing Returns to Labor in Production," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 340-55, April.
  11. Lang, Kevin & Kahn, Shulamit, 1998. "The effect of minimum-wage laws on the distribution of employment: theory and evidence," Journal of Public Economics, Elsevier, vol. 69(1), pages 67-82, July.
  12. Chander, Parkash & Wilde, Louis L, 1998. "A General Characterization of Optimal Income Tax Enforcement," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 165-83, January.
  13. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
  14. David Neumark & William Wascher, 1995. "The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys," NBER Working Papers 5092, National Bureau of Economic Research, Inc.
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  16. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
  17. Burkhauser, Richard V & Couch, Kenneth A & Wittenburg, David C, 2000. "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 653-80, October.
  18. Lollivier, Stefan & Rochet, Jean-Charles, 1983. "Bunching and second-order conditions: A note on optimal tax theory," Journal of Economic Theory, Elsevier, vol. 31(2), pages 392-400, December.
  19. Cahuc, Pierre & Michel, Philippe, 1996. "Minimum wage unemployment and growth," European Economic Review, Elsevier, vol. 40(7), pages 1463-1482, August.
  20. Rebitzer, James B. & Taylor, Lowell J., 1995. "The consequences of minimum wage laws Some new theoretical ideas," Journal of Public Economics, Elsevier, vol. 56(2), pages 245-255, February.
  21. Brunner, Johann K., 1993. "A note on the optimum income tax," Journal of Public Economics, Elsevier, vol. 50(3), pages 445-451, March.
  22. Allen, Stephen P, 1987. "Taxes, Redistribution, and the Minimum Wage: A Theoretical Analysis," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 477-89, August.
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