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Optimal Fiscal Policy with Rationing in the Labor Market

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Author Info
Arantza Gorostiaga () (Universidad del País Vasco)

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Abstract

This paper studies the implications for the optimal policy of introducing an exogenous minimum wage into a standard public finance model. We present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor income taxes and debt. We find that, for sufficiently high minimum wages, equilibria in which the labor supply is rationed and involuntary unemployment arises may be optimal in bad times. For not too high minimum wages, the government will set taxes to reduce labor supply and avoid non desirable rationing. As regards the cyclical properties of the optimal policy, state contingent returns on debt are used as shock absorbers so as to smooth private consumption over time and across states of nature.

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Publisher Info
Paper provided by Centro de Estudios Andaluces in its series Economic Working Papers at Centro de Estudios Andaluces with number E2004/10.

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Length: 25 pages
Date of creation: 2004
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Handle: RePEc:cea:doctra:e2004_10

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Related research
Keywords: Ramsey problem disequilibrium theory minimum wage involuntary unemployment

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Find related papers by JEL classification:
C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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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. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October. [Downloadable!] (restricted)
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  2. Kenneth L. Judd, 1997. "The Optimal Tax Rate for Capital Income is Negative," NBER Working Papers 6004, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal Taxation without State-Contingent Debt," Economics Working Papers 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001. [Downloadable!]
    Other versions:
  4. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June. [Downloadable!] (restricted)
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  5. V.V. Chair & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Proceedings, Federal Reserve Bank of Cleveland, pages 519-546.
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  6. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips Curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
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  8. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March. [Downloadable!] (restricted)
  9. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under imperfect competition," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 183-209, June. [Downloadable!] (restricted)
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  10. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
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  12. Pissarides, Christopher A, 1989. "Unemployment and Macroeconomics," Economica, London School of Economics and Political Science, vol. 56(221), pages 1-14, February. [Downloadable!] (restricted)
  13. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August. [Downloadable!] (restricted)
  14. Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, vol. 48(2), pages 283-306, March. [Downloadable!] (restricted)
  15. Arantza Gorostiaga, 2003. "Should Fiscal Policy be different in a Non-Competitive Framework?," DFAEII Working Papers 200228, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
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  16. Kydland, Finn E. & Prescott, Edward C., 1980. "Dynamic optimal taxation, rational expectations and optimal control," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 79-91, May. [Downloadable!] (restricted)
  17. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1994. "Optimal Fiscal Policy in a Business Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 617-52, August. [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. Steve Cassou & Arantza Gorostiaga & María José Gutiérrez & Stephen Hamilton, 2006. "Second-best tax policy in a growing economy with externalities," DFAEII Working Papers 200603, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  2. Steven P. Cassou & Arantza Gorostiaga, 2007. "Optimal fiscal policy in a multisector model with minimum expenditure requirements," DFAEII Working Papers 200701, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  3. Arantza Gorostiage & Juan F. Rubio-Ramírez, 2004. "Optimal Minimum Wage in a Competitive Economy," DFAEII Working Papers 200407, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
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