Advanced Search
MyIDEAS: Login

Optimal minimum wage policy in competitive labor markets

Contents:

Author Info

  • Lee, David
  • Saez, Emmanuel
Registered author(s):

    Abstract

    This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market and obtains two key results. First, we show that a binding minimum wage – while leading to unemployment – is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. Importantly, this result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a binding minimum wage enhances the effectiveness of transfers to low-skilled workers as it prevents low-skilled wages from falling through incidence effects. Second, when labor supply responses are along the extensive margin only, which is the empirically relevant case, the co-existence of a minimum wage with a positive tax rate on low-skilled work is always (second-best) Pareto inefficient. A Pareto improving policy consists of reducing the pre-tax minimum wage while keeping constant the post-tax minimum wage by increasing transfers to low-skilled workers, and financing this reform by increasing taxes on higher paid workers. Those results imply that the minimum wage and subsidies for low-skilled workers are complementary policies.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S0047272712000606
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

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

    Volume (Year): 96 (2012)
    Issue (Month): 9-10 ()
    Pages: 739-749

    as in new window
    Handle: RePEc:eee:pubeco:v:96:y:2012:i:9:p:739-749

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/505578

    Related research

    Keywords: Minimum wage; Optimal taxation;

    References

    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.:
    as in new window
    1. Juan J. Dolado & Florentino Felgueroso & Juan F. Jimeno, . "The Role of the Minimum Wage in the Welfare State: An Appraisal," Working Papers 2000-12, FEDEA.
    2. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    3. Robin Boadway & Katherine Cuff, 1999. "A Minimum Wage can be Welfare-Improving and Employment-Enhancing," Working Papers 980, Queen's University, Department of Economics.
    4. Cahuc, Pierre & Michel, Philippe, 1996. "Minimum wage unemployment and growth," European Economic Review, Elsevier, vol. 40(7), pages 1463-1482, August.
    5. Tomer Blumkin & Efraim Sadka, 2005. "Income Taxation and Wage Policy: An Application to Minimum Wage," International Tax and Public Finance, Springer, vol. 12(6), pages 713-722, November.
    6. Guesnerie, Roger & Roberts, Kevin, 1984. "Effective Policy Tools and Quantity Controls," Econometrica, Econometric Society, vol. 52(1), pages 59-86, January.
    7. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
    8. Naito, Hisahiro, 1999. "Re-examination of uniform commodity taxes under a non-linear income tax system and its implication for production efficiency," Journal of Public Economics, Elsevier, vol. 71(2), pages 165-188, February.
    9. Immervoll, Herwig, 2007. "Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment," IZA Discussion Papers 2555, Institute for the Study of Labor (IZA).
    10. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    11. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
    12. 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.
    13. Neumark, David & Wascher, William L., 2007. "Minimum Wages and Employment," Foundations and Trends(R) in Microeconomics, now publishers, vol. 3(1–2), pages 1-182, March.
    14. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
    15. Edward L. Glaeser & Erzo F. P. Luttmer, 2003. "The Misallocation of Housing Under Rent Control," American Economic Review, American Economic Association, vol. 93(4), pages 1027-1046, September.
    16. Immervoll, Herwig & Kleven, Henrik & Kreiner, Claus Thustrup & Saez, Emmanuel, 2004. "Welfare Reform in European Countries: A Micro-Simulation Analysis," CEPR Discussion Papers 4324, C.E.P.R. Discussion Papers.
    17. Brown, Charles, 1999. "Minimum wages, employment, and the distribution of income," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 32, pages 2101-2163 Elsevier.
    18. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2011. "Optimal Unemployment Insurance Over the Business Cycle," CEP Discussion Papers dp1078, Centre for Economic Performance, LSE.
    19. 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.
    20. Mathis Hungerbühler & Etienne Lehmann, 2007. "On the Optimality of a Minimum Wage : New Insights from Optimal Tax Theory”," Working Papers 2007-17, Centre de Recherche en Economie et Statistique.
    21. James B. Rebitzer & Lowell J. Taylor, 1991. "The Consequences of Minimum Wage Laws: Some New Theoretical Ideas," NBER Working Papers 3877, National Bureau of Economic Research, Inc.
    22. Neary, J. P. & Roberts, K. W. S., 1980. "The theory of household behaviour under rationing," European Economic Review, Elsevier, vol. 13(1), pages 25-42, January.
    23. Luttmer, Erzo F.P., 2007. "Does the Minimum Wage Cause Inefficient Rationing?," IZA Discussion Papers 2713, Institute for the Study of Labor (IZA).
    24. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," NBER Working Papers 15218, National Bureau of Economic Research, Inc.
    25. Saez, Emmanuel, 2004. "Direct or indirect tax instruments for redistribution: short-run versus long-run," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 503-518, March.
    26. Lang, Kevin, 1987. "Pareto Improving Minimum Wage Laws," Economic Inquiry, Western Economic Association International, vol. 25(1), pages 145-58, January.
    27. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc.
    28. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
    29. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
    30. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
    31. Nichols, Albert L & Zeckhauser, Richard J, 1982. "Targeting Transfers through Restrictions on Recipients," American Economic Review, American Economic Association, vol. 72(2), pages 372-77, May.
    32. Acemoglu, Daron, 2001. "Good Jobs versus Bad Jobs," Journal of Labor Economics, University of Chicago Press, vol. 19(1), pages 1-21, January.
    33. Johnson, William R & Browning, Edgar K, 1983. "The Distributional and Efficiency Effects of Increasing the Minimum Wage: A Simulation," American Economic Review, American Economic Association, vol. 73(1), pages 204-11, March.
    34. Cahuc, P. & Saint-Martin, A. & Zylberberg, A., 2001. "The consequences of the minimum wage when other wages are bargained over," European Economic Review, Elsevier, vol. 45(2), pages 337-352, February.
    35. Jesse Rothstein, 2009. "Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence," Working Papers 1160, Princeton University, Department of Economics, Center for Economic Policy Studies..
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Jonathan Meer & Jeremy West, 2013. "Effects of the Minimum Wage on Employment Dynamics," NBER Working Papers 19262, National Bureau of Economic Research, Inc.
    2. Danziger, Eliav & Danziger, Leif, 2014. "A Pareto-Improving Minimum Wage," IZA Discussion Papers 8123, Institute for the Study of Labor (IZA).
    3. Reich, MIchael & Jacobs, Ken & Bernhardt, Annette, 2014. "Local Minimum Wage Laws: Impacts on Workers, Families and Businesses," Institute for Research on Labor and Employment, Working Paper Series qt9pf1225f, Institute of Industrial Relations, UC Berkeley.
    4. Alexander Muravyev & Aleksey Oshchepkov, 2013. "Minimum wages and labor market outcomes: evidence from the emerging economy of Russia," HSE Working papers WP BRP 29/EC/2013, National Research University Higher School of Economics.
    5. Lichter, Andreas & Peichl, Andreas & Siegloch, Sebastian, 2013. "Exporting and Labor Demand: Micro-Level Evidence from Germany," IZA Discussion Papers 7494, Institute for the Study of Labor (IZA).
    6. Bas Jacobs, 2013. "From Optimal Tax Theory to Applied Tax Policy," CESifo Working Paper Series 4151, CESifo Group Munich.
    7. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).
    8. Tomer Blumkin & Leif Danziger, 2014. "Deserving Poor and the Desirability of Minimum Wage Rules," CESifo Working Paper Series 4721, CESifo Group Munich.
    9. Laurence Jacquet & Etienne Lehmann & Bruno Linden, 2014. "Optimal income taxation with Kalai wage bargaining and endogenous participation," Social Choice and Welfare, Springer, vol. 42(2), pages 381-402, February.
    10. Eliav Danziger & Leif Danziger, 2014. "A Pareto-Improving Minimum Wage," CESifo Working Paper Series 4762, CESifo Group Munich.
    11. Blumkin, Tomer & Sadka, Efraim & Shem-Tov, Yotam, 2013. "A case for maximum wage," Economics Letters, Elsevier, vol. 120(3), pages 374-378.
    12. Aart Gerritsen & Bas Jacobs, 2014. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," CESifo Working Paper Series 4588, CESifo Group Munich.
    13. Muravyev, Alexander & Oshchepkov, Aleksey, 2013. "Minimum Wages, Unemployment and Informality: Evidence from Panel Data on Russian Regions," IZA Discussion Papers 7878, Institute for the Study of Labor (IZA).

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:96:y:2012:i:9:p:739-749. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.