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An Efficiency Enhancing Minimum Wage

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  • Omer Gokcekus
  • Edward Tower

Abstract

We consider an economy with a tax on all labor earnings. We discover that a slightly binding minimum wage on one sector can enhance efficiency. The minimum wage attracts high-reservation wage workers into the minimum-wage sector. If the labor demand curve in the free sector is quite flat, the vast majority of workers displaced by the minimum wage find employment in the free sector, raising aggregate employment. This displacement of workers by the only slightly binding minimum wage has negligible effects on efficiency. So efficiency and tax revenue rise as the minimum wage pulls labor out of untaxed leisure, where too much of the labor force is lurking, into taxed work.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

Volume (Year): 6 (2003)
Issue (Month): 4 ()
Pages: 247-259

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Handle: RePEc:taf:jpolrf:v:6:y:2003:i:4:p:247-259

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Related research

Keywords: Minimum wage; Employment; Economic efficiency;

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References

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  1. Gang, Ira N & Tower, Edward, 1990. "Allocating Jobs under a Minimum Wage: Queues vs. Lotteries," The Economic Record, The Economic Society of Australia, vol. 66(194), pages 186-94, September.
  2. Basch, Michael & Paredes-Molina, Ricardo D., 1996. "Are there dual labor markets in Chile?: empirical evidence," Journal of Development Economics, Elsevier, vol. 50(2), pages 297-312, August.
  3. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-93, September.
  4. Welch, Finis, 1974. "Minimum Wage Legislation in the United States," Economic Inquiry, Western Economic Association International, vol. 12(3), pages 285-318, September.
  5. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
  6. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December.
  7. Edwards, Sebastian & Edwards, Alejandra Cox, 1991. "Monetarism and Liberalization," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226184890, February.
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Cited by:
  1. Luciano Fanti & Luca Gori, 2007. "Fertility, income and welfare in an OLG model with regulated wages," International Review of Economics, Springer, vol. 54(4), pages 405-427, December.

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