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On the optimality of a minimum wage: New insights from optimal tax theory

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Author Info
Hungerbühler, Mathias
Lehmann, Etienne

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Abstract

We build a theoretical model to study whether a minimum wage can be welfare-improving if it is implemented in conjunction with an optimized nonlinear income tax. We consider this issue in a framework where search frictions on the labor market generate unemployment. Workers differ in productivity. The government does not observe workers' productivity but only their wages. Hence, the redistributive policy solves an adverse selection problem. We show that a minimum wage is optimal if the bargaining power of the workers is relatively low. However, if the government controls the bargaining power, then it is preferable to set a sufficiently high bargaining power.

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Publisher Info
Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 93 (2009)
Issue (Month): 3-4 (April)
Pages: 464-481
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Handle: RePEc:eee:pubeco:v:93:y:2009:i:3-4:p:464-481

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Web page: http://www.elsevier.com/locate/inca/505578

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Related research
Keywords: Optimal taxation Minimum wage Search-matching unemployment Bunching Wage bargaining;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Mathias Hungerbühler & Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2006. "Optimal Redistributive Taxation in a Search Equilibrium Model," Review of Economic Studies, Blackwell Publishing, vol. 73(3), pages 743-767, 07. [Downloadable!] (restricted)
    Other versions:
  2. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498. [Downloadable!] (restricted)
  3. Boone, Jan & Bovenberg, A Lans, 2001. "Optimal Labour Taxation and Search," CEPR Discussion Papers 3002, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. 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. [Downloadable!] (restricted)
  5. Dreze, Jacques H. & Gollier, Christian, 1993. "Risk sharing on the labour market and second-best wage rigidities," European Economic Review, Elsevier, vol. 37(8), pages 1457-1482, December. [Downloadable!] (restricted)
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  6. Pierre Cahuc & Guy Laroque, 2007. "Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?," IZA Discussion Papers 2955, Institute for the Study of Labor (IZA). [Downloadable!]
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  7. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  8. Robin Boadway & Katherine Cuff, 1999. "A Minimum Wage Can Be Welfare-Improving and Employment-Enhancing," Cahiers de recherche CREFE / CREFE Working Papers 72, CREFE, Université du Québec à Montréal. [Downloadable!]
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  9. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier. [Downloadable!] (restricted)
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  10. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 279-98, April. [Downloadable!] (restricted)
  11. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Blackwell Publishing, vol. 96(1), pages 67-81.
  12. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March. [Downloadable!] (restricted)
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  13. Barbara Petrongolo & Christopher A. Pissarides, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June. [Downloadable!] (restricted)
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  14. Allen, Franklin, 1982. "Optimal linear income taxation with general equilibrium effects on wages," Journal of Public Economics, Elsevier, vol. 17(2), pages 135-143, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pierre Cahuc & Guy Laroque, 2007. "Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?," IZA Discussion Papers 2955, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  2. Dominique Demougin & Carsten Helm, 2009. "Incentive Contracts and Efficient Unemployment Benefits," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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