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A Minimum Wage can be Welfare-Improving and Employment-Enhancing

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Author Info
Robin Boadway () (Queen's University)
Katherine Cuff (Queen's University)

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Abstract

We examine whether minimum wages can fulfill a useful role as part of an optimal nonlinear 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.

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File URL: http://www.econ.queensu.ca/working_papers/papers/qed_wp_980.pdf
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File Function: First version 1999
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Publisher Info
Paper provided by Queen's University, Department of Economics in its series Working Papers with number 980.

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Length: 40 pages
Date of creation: Feb 1999
Date of revision:
Handle: RePEc:qed:wpaper:980

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Related research
Keywords: Minimum Wage; Optimal Income Tax; Unemployment;

Other versions of this item:

Find related papers by 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

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. David Neumark & William Wascher, 1995. "The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys," NBER Working Papers 5092, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Cahuc, Pierre & Michel, Philippe, 1996. "Minimum wage unemployment and growth," European Economic Review, Elsevier, vol. 40(7), pages 1463-1482, August. [Downloadable!] (restricted)
    Other versions:
  3. Robin Boadway & Katherine Cuff & Maurice Marchand, 1999. "Optimal Income Taxation With Quasi-Linear Preferences Revisited," Working Papers 984, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
  4. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May. [Downloadable!] (restricted)
  5. Robin Boadway & Katherine Cuff, 1999. "Monitoring Job Search as an Instrument for Targeting Transfers," Working Papers 982, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
  6. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498. [Downloadable!] (restricted)
  7. Lollivier, Stefan & Rochet, Jean-Charles, 1983. "Bunching and second-order conditions: A note on optimal tax theory," Journal of Economic Theory, Elsevier, vol. 31(2), pages 392-400, December. [Downloadable!] (restricted)
  8. Ebert, Udo, 1992. "A reexamination of the optimal nonlinear income tax," Journal of Public Economics, Elsevier, vol. 49(1), pages 47-73, October. [Downloadable!] (restricted)
  9. Marhuenda, Francisco & Ortuno-Ortin, Ignacio, 1997. " Tax Enforcement Problems," Scandinavian Journal of Economics, Blackwell Publishing, vol. 99(1), pages 61-72, March. [Downloadable!] (restricted)
  10. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Blackwell Publishing, vol. 38(114), pages 175-208, April. [Downloadable!] (restricted)
  11. Burkhauser, Richard V & Couch, Kenneth A & Wittenburg, David C, 2000. "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," Journal of Labor Economics, University of Chicago Press, vol. 18(4), pages 653-80, October. [Downloadable!] (restricted)
  12. Boadway, Robin & Marchand, Maurice & Sato, Motohiro, 1998. " Subsidies versus Public Provision of Private Goods as Instruments for Redistribution," Scandinavian Journal of Economics, Blackwell Publishing, vol. 100(3), pages 545-64, September. [Downloadable!] (restricted)
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  13. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
    Other versions:
  15. Boadway, Robin & Marchand, Maurice, 1995. "The Use of Public Expenditures for Redistributive Purposes," Oxford Economic Papers, Oxford University Press, vol. 47(1), pages 45-59, January. [Downloadable!] (restricted)
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  16. Swinnerton, Kenneth A, 1996. "Minimum Wages in an Equilibrium Search Model with Diminishing Returns to Labor in Production," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 340-55, April. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cahuc, Pierre & Laroque, Guy, 2007. "Optimal Taxation and Monopsonistic Labour Market: Does Monopsony Justify the Minimum Wage?," CEPR Discussion Papers 6416, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Arantza Gorostiaga & Juan Francisco Rubio-Ramírez, 2004. "Optimal minimum wage in a competitive economy," Working Paper 2004-30, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  3. Pinoli, Sara, 2008. "Rational Expectations and the Puzzling No-Effect of the Minimum Wage," MPRA Paper 11405, University Library of Munich, Germany. [Downloadable!]
  4. Aronsson, Thomas & Koskela, Erkki, 2008. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," UmeÃ¥ Economic Studies 759, Umeå University, Department of Economics. [Downloadable!]
  5. Willem Molle, 2002. "Globalization, Regionalism and Labour Markets: Should We Recast the Foundations of the EU Regime in Matters of Regional (Rural and Urban) Development?," Regional Studies, Taylor and Francis Journals, vol. 36(2), pages 161-172, April. [Downloadable!] (restricted)
  6. Etienne Lehmann & Mathias Hungerbühler, 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). [Downloadable!]
    Other versions:
  7. David S. Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," Working Papers 1105, Princeton University, Department of Economics, Industrial Relations Section.. [Downloadable!]
  8. Hisahiro Naito, 2003. "Endogenous Human Capital Accumulation, Comparative Advantage and Direct vs. Indirect Redistribution," ISER Discussion Paper 0590, Institute of Social and Economic Research, Osaka University. [Downloadable!]
    Other versions:
  9. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Stephen Coate, 1999. "An Efficiency Approach to the Evaluation of Policy Changes," NBER Working Papers 7316, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  11. Hisahiro Naito, 2003. "Atkinson and Stiglitz Theorem with Endogenous Human Capital Accumulation," ISER Discussion Paper 0596, Institute of Social and Economic Research, Osaka University. [Downloadable!]
  12. Thomas Aronsson & Erkki Koskela, 2008. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  13. Aronsson, Thomas & Koskela, Erkki, 2009. "Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment," IZA Discussion Papers 4196, Institute for the Study of Labor (IZA). [Downloadable!]
  14. Robin Boadway, 1998. "Redistributing Smarter: Self-Selection, Targeting and Non-Conventional Policy Instruments," Canadian Public Policy, University of Toronto Press, vol. 24(3), pages 365-369, September. [Downloadable!] (restricted)
  15. Tomer Blumkin & Efraim Sadka, 2005. "Income Taxation and Wage Policy: An Application to Minimum Wage," International Tax and Public Finance, Springer, vol. 12(6), pages 713-722, November. [Downloadable!] (restricted)
  16. Stephen Devereux, 2005. "Can minimum wages contribute to poverty reduction in poor countries?," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(7), pages 899-912. [Downloadable!]
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