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A Minimum Wage Can Be Welfare-Improving and Employment-Enhancing

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Abstract

We examine whether minimum wages can fulfill a useful role as part of an optimal non-linear income tax scheme. In this setting, governments cannot observe household abilities, only their incomes. Redistributing according to income, the government is constrained by a set of incentive constraints. Firms, on the other hand, are able to identify abilities of workers. To exploit that, the government imposes a minimum wage. This will preclude firms from offering a job to anyone below the minimum wage. The use of the minimum wage policy combined with the institutional features of typical welfare systems allows the incentive constraints to be severed at the ability level associated with the minimum wage. If such a scheme can be enforced, the government can increase the amount of redistribution from those working to those not working. Moreover, the optimal minimum wage may actually lower the number of unemployed. Nous étudions la possibilité qu'un salaire minimum soit une composante utile d'un système de taxation non-linéaire optimale du revenu. Dans un tel cadre, les gouvernements observent le revenu des individus, mais pas leur habileté. La redistribution ne pouvant dépendre que du revenu, le gouvernement est contraint par un ensemble de contraintes d'incitation. Les firmes peuvent par ailleurs observer les habiletés des travailleurs. Afin d'exploiter ce dernier fait, le gouvernement impose un salaire minimum. La mise en place d'un salaire minimum, étant donné les caractéristiques institutionnelles des systèmes d'aide sociale habituels, permet de relâcher la contrainte d'incitation des individus ayant une habilité égale au salaire minimum. Si un tel système peut être mis en vigueur, le gouvernement peut accroître l'ampleur de la redistribution de ceux qui travaillent vers ceux qui ne travaillent pas. De plus, il est possible que le salaire minimum optimal diminue le nombre de chômeurs.

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  • Robin Boadway & Katherine Cuff, 1999. "A Minimum Wage Can Be Welfare-Improving and Employment-Enhancing," Cahiers de recherche CREFE / CREFE Working Papers 72, CREFE, Université du Québec à Montréal.
    • Handle: RePEc:cre:crefwp:72
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    More about this item

    Keywords

    minimum wage; optimal income tax; unemployment;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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