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Is a Minimum Wage an Appropriate Instrument for Redistribution?

  • Aart Gerritsen
  • Bas Jacobs
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    We analyze the redistributive (dis)advantages of a minimum wage over income taxation in competitive labor markets. A minimum wage causes more unemployment, but also leads to more skill formation as unemployment is concentrated on low-skilled workers. A simple condition based on three sufficient statistics shows that a minimum wage is desirable if the social welfare gains of more skill formation outweigh the social welfare losses of increased unemployment. Using a highly conservative calibration, a minimum wage decrease is shown to be part of a Pareto-improving policy reform for all countries under consideration, except possibly the United States.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2014/wp-cesifo-2014-01/cesifo1_wp4588.pdf
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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4588.

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    Date of creation: 2014
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    Handle: RePEc:ces:ceswps:_4588
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    1. Petrongolo, Barbara & San Segundo, Maria J., 2002. "Staying-on at school at 16: the impact of labor market conditions in Spain," Economics of Education Review, Elsevier, vol. 21(4), pages 353-365, August.
    2. David H. Autor & Alan Manning & Christopher L. Smith, 2010. "The Contribution of the Minimum Wage to U.S. Wage Inequality over Three Decades: A Reassessment," NBER Working Papers 16533, National Bureau of Economic Research, Inc.
    3. Palda, Filip, 2000. "Some deadweight losses from the minimum wage: the cases of full and partial compliance," Labour Economics, Elsevier, vol. 7(6), pages 751-783, November.
    4. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
    5. Mathis Hungerbühler & Etienne Lehmann, 2007. "On the Optimality of a Minimum Wage : New Insights from Optimal Tax Theory”," Working Papers 2007-17, Centre de Recherche en Economie et Statistique.
    6. Kane, Thomas J, 1994. "College Entry by Blacks since 1970: The Role of College Costs, Family Background, and the Returns to Education," Journal of Political Economy, University of Chicago Press, vol. 102(5), pages 878-911, October.
    7. Teulings, Coen N, 2000. "Aggregation Bias in Elasticities of Substitution and the Minimum Wage Paradox," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(2), pages 359-98, May.
    8. Allen, Stephen P, 1987. "Taxes, Redistribution, and the Minimum Wage: A Theoretical Analysis," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 477-89, August.
    9. Diamond, P. A., 1975. "A many-person Ramsey tax rule," Journal of Public Economics, Elsevier, vol. 4(4), pages 335-342, November.
    10. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
    11. Luttmer, Erzo F.P., 2007. "Does the Minimum Wage Cause Inefficient Rationing?," IZA Discussion Papers 2713, Institute for the Study of Labor (IZA).
    12. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    13. Nickell, Stephen, 1979. "Education and Lifetime Patterns of Unemployment," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S117-31, October.
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