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Capital Tax and Minimum Wage: Implications for the Dispersion of Wages

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  • Alok Kumar

    ()
    (Economics University of Victoria)

Abstract

This paper analyzes the general equilibrium effects of capital tax when there is a mandated minimum wage. The analysis is conducted in an inter-temporal search model in which firms post wages as in Burdett and Mortensen (1998). A(binding) minimum wage provides alower support for the distribution of wages. A decrease in capital tax leads to an increase in wage dispersion. In contrast, when the minimum wage is not binding, a lower capital tax reduces the dispersion in wages. A binding minimum wage also magnifies the positive effects of a lower capital tax on labor supply, employment, and output. The analysis suggests that a policy change which involves an increase in minimum wage and a fall in capital tax such that unemployment rate remains constant reduces dispersion of wages

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 345.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:345

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Keywords: Labor market search; capital tax; minimum wage; labor supply; wage dispersion; wage posting; general equilibrium;

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