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Optimal Fiscal Policy with Rationing in the Labor Market

Author

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  • Gorostiaga Arantza

    (Universidad del Pais Vasco)

Abstract

This paper studies the implications for the optimal policy of introducing an exogenous minimum wage into a standard public finance model. I present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor income taxes and debt. I find that for sufficiently high minimum wages, equilibria in which the labor supply is rationed and involuntary unemployment arises may be optimal in bad times. For a minimum wage not too high, the government will set taxes to reduce the labor supply and avoid non desirable rationing. This implies increasing taxes in bad times. As regards the cyclical properties of the optimal policy, state contingent returns on debt are used as shock absorbers so as to smooth private consumption over time and across states of nature.

Suggested Citation

  • Gorostiaga Arantza, 2005. "Optimal Fiscal Policy with Rationing in the Labor Market," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-22, July.
    • Handle: RePEc:bpj:bejmac:v:topics.5:y:2005:i:1:n:17
    DOI: 10.2202/1534-5998.1265
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    Cited by:

    1. repec:ehu:dfaeii:6749 is not listed on IDEAS
    2. Saif asif Khan & Sajawal Khan, 2011. "Optimal Taxation, Inflation and the Formal and Informal Sectors," SBP Working Paper Series 40, State Bank of Pakistan, Research Department.
    3. repec:ehu:dfaeii:6873 is not listed on IDEAS
    4. Arantza Gorostiaga & Juan F. Rubio-Ramirez, 2004. "Optimal minimum wage in a competitive economy," FRB Atlanta Working Paper 2004-30, Federal Reserve Bank of Atlanta.
    5. repec:ehu:dfaeii:6726 is not listed on IDEAS
    6. Gorostiaga, Arantza & Rubio-Ramirez, Juan F., 2007. "Optimal minimum wage in a competitive economy: An alternative modelling approach," Economic Modelling, Elsevier, vol. 24(5), pages 778-796, September.
    7. Steven Cassou & Arantza Gorostiaga & María Gutiérrez & Stephen Hamilton, 2010. "Second-best tax policy and natural resource management in growing economies," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(6), pages 607-626, December.
    8. Steven P. Cassou & Arantza Gorostiaga, 2009. "Optimal Fiscal Policy in a Multisector Model: The Price Consequences of Government Spending," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(2), pages 177-201, April.

    More about this item

    Keywords

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    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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