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An Efficiency Enhancing Minimum Wage

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  • Omer Gokcekus
  • Edward Tower

Abstract

We consider an economy with a tax on all labor earnings. We discover that a slightly binding minimum wage on one sector can enhance efficiency. The minimum wage attracts high‐reservation wage workers into the minimum‐wage sector. If the labor demand curve in the free sector is quite flat, the vast majority of workers displaced by the minimum wage find employment in the free sector, raising aggregate employment. This displacement of workers by the only slightly binding minimum wage has negligible effects on efficiency. So efficiency and tax revenue rise as the minimum wage pulls labor out of untaxed leisure, where too much of the labor force is lurking, into taxed work.

Suggested Citation

  • Omer Gokcekus & Edward Tower, 2003. "An Efficiency Enhancing Minimum Wage," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(4), pages 247-259.
    • Handle: RePEc:taf:jpolrf:v:6:y:2003:i:4:p:247-259
    DOI: 10.1080/134841280140001699003
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    References listed on IDEAS

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    Cited by:

    1. Todd J. Barry, 2020. "The push for a U.S. living wage: Modeling for inflation, unemployment, both, or neither," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 68-105,106-.
    2. Luciano Fanti & Luca Gori, 2007. "Fertility, income and welfare in an OLG model with regulated wages," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 54(4), pages 405-427, December.

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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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