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Minimum Wage Policy with Optimal Taxes and Unemployment

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  • Adam M. Lavecchia

Abstract

Using a search model, I derive formula that links the welfare gains from the minimum wage to its effect on low-skilled labor force participation and employment. This formula shows that the minimum wage is welfare improving if pushing the low-skilled labor market tightness downwards brings it closer to its efficient level. I estimate the causal effect of the minimum wage on low-skilled labor force participation and employment using federal and state minimum wage variation. I discuss the policy implications of my estimates when viewed through the lens of the marginal welfare gain formula.

Suggested Citation

  • Adam M. Lavecchia, 2019. "Minimum Wage Policy with Optimal Taxes and Unemployment," Department of Economics Working Papers 2019-03, McMaster University.
    • Handle: RePEc:mcm:deptwp:2019-03
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    Cited by:

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    3. Aart Gerritsen & Bas Jacobs, 2020. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," Economica, London School of Economics and Political Science, vol. 87(347), pages 611-637, July.
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    5. Dami'an Vergara, 2022. "Minimum Wages and Optimal Redistribution," Papers 2202.00839, arXiv.org, revised Dec 2022.
    6. Simon, Andrew & Wilson, Matthew, 2021. "Optimal minimum wage setting in a federal system," Journal of Urban Economics, Elsevier, vol. 123(C).
    7. Epstein, Brendan & Nunn, Ryan & Orak, Musa & Patel, Elena, 2023. "Taxation, social welfare, and labor market frictions," European Economic Review, Elsevier, vol. 151(C).
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    9. Griffy, Benjamin & Masters, Adrian, 2022. "Labor market policy in the presence of a participation externality," European Economic Review, Elsevier, vol. 144(C).
    10. Boadway,Robin & Cuff,Katherine, 2022. "Tax Policy," Cambridge Books, Cambridge University Press, number 9781108949453.

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    More about this item

    Keywords

    Minimum wage; Sufficient statistics; Optimal policy; Labor force participation;
    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
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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