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An Efficiency Enhancing Minimum Wage

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Author Info
Gokcekus, Omer
Tower, Edward

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Abstract

We consider an economy (e.g., Chile 1973-83 or modern Turkey) with a minimum wage sector and a free sector, and a tax on labor earnings. We ask "Can a slightly binding minimum wage simultaneously raise tax revenue, employment, and economic efficiency?" We answer "Yes, if the elasticity of demand for labor in the minimum-wage sector exceeds the elasticity of demand in the free sector." The logical key is that the minimum wage draws high reservation-wage workers into the labor force, who give up untaxed leisure in exchange for taxed work and thereby increase revenue, employment and efficiency.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 03-01.

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Date of creation: 2003
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Handle: RePEc:duk:dukeec:03-01

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Find related papers by JEL classification:
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
J6 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies

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  1. 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. [Downloadable!] (restricted)
  2. David Neumark & William Wascher, 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. [Downloadable!] (restricted)
  3. Welch, Finis, 1974. "Minimum Wage Legislation in the United States," Economic Inquiry, Oxford University Press, vol. 12(3), pages 285-318, September.
  4. 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.
  5. 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. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
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