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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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References

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  1. Beaudry, Paul & Blackorby, Charles, 2006. "Taxes and Employment Subsidies in Optimal Redistribution Programs," The Warwick Economics Research Paper Series (TWERPS) 766, University of Warwick, Department of Economics.
  2. 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.
  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. 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.
  5. Manning, Alan, 1995. "How Do We Know That Real Wages Are Too High?," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 1111-25, November.
  6. Drazen, Allan, 1986. "Optimal Minimum Wage Legislation," Economic Journal, Royal Economic Society, vol. 96(383), pages 774-84, September.
  7. Allen, Stephen P, 1987. "Taxes, Redistribution, and the Minimum Wage: A Theoretical Analysis," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 477-89, August.
  8. 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.
  9. Flinn, Christopher, 2003. "Minimum Wage Effects on Labor Market Outcomes under Search with Bargaining," IZA Discussion Papers 949, Institute for the Study of Labor (IZA).
  10. 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.
  11. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," NBER Working Papers 12663, National Bureau of Economic Research, Inc.
  12. Dolado, Juan J. & Felgueroso, Florentino & Jimeno, Juan F., 2000. "The Role of the Minimum Wage in the Welfare State: An Appraisal," IZA Discussion Papers 152, Institute for the Study of Labor (IZA).
  13. Rebitzer, James B. & Taylor, Lowell J., 1995. "The consequences of minimum wage laws Some new theoretical ideas," Journal of Public Economics, Elsevier, vol. 56(2), pages 245-255, February.
  14. 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.
  15. Guy Laroque, 2005. "Income Maintenance and Labor Force Participation," Econometrica, Econometric Society, vol. 73(2), pages 341-376, 03.
  16. Bhaskar, V & To, Ted, 1999. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Economic Journal, Royal Economic Society, vol. 109(455), pages 190-203, April.
  17. Emmanuel Saez, 2000. "Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses," NBER Working Papers 7708, National Bureau of Economic Research, Inc.
  18. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  19. Philippe Chone & Guy Laroque, 2001. "Optimal Incentives for Labor Force Participation," Working Papers 2001-26, Centre de Recherche en Economie et Statistique.
  20. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
  21. Philippe Choné & Guy Laroque, 2006. "Should Low Skilled Work be Subsidized ?," Working Papers 2006-08, Centre de Recherche en Economie et Statistique.
  22. Beaudry, Paul & Blackorby, 1997. "Taxes and employment subsidies in an optimal redistribution program," CEPREMAP Working Papers (Couverture Orange) 9709, CEPREMAP.
  23. Diamond, P., 1980. "Income taxation with fixed hours of work," Journal of Public Economics, Elsevier, vol. 13(1), pages 101-110, February.
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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. Hungerbühler, Mathias & Lehmann, Etienne, 2007. "On the Optimality of a Minimum Wage: New Insights from Optimal Tax Theory," IZA Discussion Papers 2957, Institute for the Study of Labor (IZA).
  2. repec:hal:journl:halshs-00638149 is not listed on IDEAS
  3. 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.
  4. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc.
  5. repec:hal:cesptp:halshs-00638149 is not listed on IDEAS

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