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

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  • Cahuc, Pierre

    ()
    (Ecole Polytechnique, Paris)

  • Laroque, Guy

    ()
    (CREST-INSEE)

Abstract

We analyze optimal taxation in an economy with monopsonistic labor 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2955.

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Length: 26 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:iza:izadps:dp2955

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Keywords: optimal taxation; minimum wage; monopsony;

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  1. Immervoll, Herwig, 2007. "Minimum Wages, Minimum Labour Costs and the Tax Treatment of Low-Wage Employment," IZA Discussion Papers 2555, Institute for the Study of Labor (IZA).
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  4. Manning, Alan, 1995. "How Do We Know That Real Wages Are Too High?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 110(4), pages 1111-25, November.
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  20. Philippe Choné & Guy Laroque, 2006. "Should Low Skilled Work be Subsidized ?," Working Papers, Centre de Recherche en Economie et Statistique 2006-08, Centre de Recherche en Economie et Statistique.
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Blog mentions

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  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. repec:hal:journl:halshs-00638149 is not listed on IDEAS
  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. Pierre Cahuc & Cette Gilbert & André Zylberberg, 2008. "Salaire minimum et bas revenus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL halshs-00638149, HAL.
  4. Mathis Hungerbühler & Etienne Lehmann, 2007. "On the Optimality of a Minimum Wage : New Insights from Optimal Tax Theory”," Working Papers, Centre de Recherche en Economie et Statistique 2007-17, Centre de Recherche en Economie et Statistique.
  5. Sell, Friedrich L. & Ruf, Ernst K., 2014. "Anmerkungen zum Monopson am Arbeitsmarkt II," Working Papers in Economics, Universität der Bundeswehr München, Economic Research Group 2014,1, Universität der Bundeswehr München, Economic Research Group.

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