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Optimal Taxation and Monopsonistic Labour Market: Does Monopsony Justify the Minimum Wage?

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  • Cahuc, Pierre
  • Laroque, Guy

Abstract

We analyze optimal taxation in an economy with monopsonistic labour markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the opportunity costs of work, chooses a tax scheme implementing the second best allocation. We compare the optima in the competitive and monopsonistic environments. We find that the government can always implement the second best allocation of the competitive economy in the monopsonistic environment. The optimal tax schedule comprises employment subsidies financed by taxes on profits. In this setup, there is no room for a minimum wage.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6416.

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Date of creation: Aug 2007
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Handle: RePEc:cpr:ceprdp:6416

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Keywords: Minimum wage; Monopsony; Optimal taxation;

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  1. Paul Beaudry & Charles Blackorby & Dezs� Szalay, 2009. "Taxes and Employment Subsidies in Optimal Redistribution Programs," American Economic Review, American Economic Association, vol. 99(1), pages 216-42, March.
  2. V. Bhaskar & Ted To, 1996. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Labor and Demography 9603001, EconWPA, revised 21 May 1996.
  3. Masters, Adrian M, 1999. "Wage Posting in Two-Sided Search and the Minimum Wage," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 809-26, November.
  4. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
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  7. Hungerbühler, Mathias & Lehmann, Etienne, 2009. "On the optimality of a minimum wage: New insights from optimal tax theory," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 464-481, April.
  8. Herwig Immervoll, 2007. "Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment," OECD Social, Employment and Migration Working Papers 46, OECD Publishing.
  9. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, 03.
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  17. Boadway, Robin & Cuff, Katherine, 2001. "A minimum wage can be welfare-improving and employment-enhancing," European Economic Review, Elsevier, vol. 45(3), pages 553-576, March.
  18. Philippe Choné & Guy Laroque, 2006. "Should Low Skilled Work be Subsidized ?," Working Papers 2006-08, Centre de Recherche en Economie et Statistique.
  19. 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.
  20. 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.
  21. Alan Manning, 2010. "Imperfect competition in the labour market," LSE Research Online Documents on Economics 28729, London School of Economics and Political Science, LSE Library.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Minimum wages and optimal taxes
    by Economic Logician in Economic Logic on 2009-02-23 14:11:00
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Cited by:
  1. Sell, Friedrich L. & Ruf, Ernst K., 2014. "Anmerkungen zum Monopson am Arbeitsmarkt II," Working Papers in Economics 2014,1, Universität der Bundeswehr München, Economic Research Group.
  2. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc.
  3. repec:hal:journl:halshs-00638149 is not listed on IDEAS
  4. 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.
  5. Pierre Cahuc & Cette Gilbert & André Zylberberg, 2008. "Salaire minimum et bas revenus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00638149, HAL.

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