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Capital Tax, Minimum Wage, and Labor Market Outcomes

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  • Alok Kumar

    (University of Victoria)

Abstract

Often an increase in the minimum wage is accompanied by a reduction in the capital tax. This paper analyzes the effects of interactions between the minimum wage and the capital tax in the general equilibrium framework. The analysis is conducted in an inter-temporal search model in which firms post wages. A (binding) minimum wage provides a lower support for the distribution of wages. The paper finds that the interaction of these two policy instruments significantly modify labor market outcomes and welfare cost. In the presence of a binding minimum wage, a decrease in the capital tax leads to an increase in wage dispersion. In contrast, when it is not binding, a lower capital tax may reduce the dispersion in wages. A binding minimum wage magnifies the positive effects of a lower capital tax on labor supply, employment, and output. It also enhances the welfare cost of capital tax. A policy change which involves an increase in the minimum wage and a fall in the capital tax such that employment level remains constant increases welfare and output. (Copyright: Elsevier)

Suggested Citation

  • Alok Kumar, 2008. "Capital Tax, Minimum Wage, and Labor Market Outcomes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 133-154, January.
    • Handle: RePEc:red:issued:06-147
    DOI: 10.1016/j.red.2007.06.005
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    Cited by:

    1. C. Y. Kelvin Yuen & Ping Wang, 2019. "Minimum Wage in a Multi-Tier Search and Wage-Posting Model with Cross-Market Substitutions," NBER Working Papers 26378, National Bureau of Economic Research, Inc.
    2. Alok Kumar, 2019. "Subjective Income Expectations and Risks in Rural India," Journal of Developing Areas, Tennessee State University, College of Business, vol. 53(3), pages 11-25, Summer.
    3. Chi-Chur Chao & Eden Siu Hung Yu, 2014. "Minimum Wage and Capital Taxes," Review of Development Economics, Wiley Blackwell, vol. 18(2), pages 195-202, May.
    4. Aspen Gorry & Jeremy J. Jackson, 2017. "A Note On The Nonlinear Effect Of Minimum Wage Increases," Contemporary Economic Policy, Western Economic Association International, vol. 35(1), pages 53-61, January.
    5. Seok, Byoung Hoon & You, Hye Mi, 2022. "Macroeconomic impacts of increasing the minimum wage: The case of Korea," Economic Modelling, Elsevier, vol. 113(C).
    6. Alok Kumar, 2019. "Subjective Income Expectations and Risks in Rural India," Journal of Developing Areas, Tennessee State University, College of Business, vol. 53(3), pages 11-25, Summer.
    7. Alok Kumar & Kam Shergill, 2017. "The dynamics of rural non-farm employment in India," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 60(4), pages 613-624, December.

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    More about this item

    Keywords

    General equilibrium; Welfare; Capital tax; Labor supply; Minimum wage; Wage posting; Search; Dispersion of wages;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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