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On the Optimality of a Minimum Wage : New Insights from Optimal Tax Theory”

  • Mathis Hungerbühler

    (Crest)

  • Etienne Lehmann

    (Crest)

We build a theoretical model to study whether a minimum wage can be welfare-improving ifit is implemented in conjunction with an optimized nonlinear income tax. We consider thisissue in a framework where search frictions on the labor market generate unemployment.Workers differ in productivity. The government does not observe workers' productivity butonly their wages. Hence, the redistributive policy solves an adverse selection problem. Weshow that a minimum wage is optimal if the bargaining power of the workers is relativelylow. However, if the government controls the bargaining power, then it is preferable to set asufficiently high bargaining power.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2007-17.

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Length: 31
Date of creation: 2007
Date of revision:
Handle: RePEc:crs:wpaper:2007-17
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  1. DREZE, Jacques & GOLLIER, Christian, . "Risk sharing on the labour market and second-best wage rigidities," CORE Discussion Papers RP -1073, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Allen, Franklin, 1982. "Optimal linear income taxation with general equilibrium effects on wages," Journal of Public Economics, Elsevier, vol. 17(2), pages 135-143, March.
  3. Barbara Petrongolo & Christopher Pissarides, 2000. "Looking into the black box: a survey of the matching function," LSE Research Online Documents on Economics 2122, London School of Economics and Political Science, LSE Library.
  4. 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.
  5. Hungerbühler, Mathias & Lehmann, Etienne & Parmentier, Alexis & Van der Linden, Bruno, 2005. "Optimal Redistributive Taxation in a Search Equilibrium Model," IZA Discussion Papers 1460, Institute for the Study of Labor (IZA).
  6. Boone, Jan & Bovenberg, A Lans, 2001. "Optimal Labour Taxation and Search," CEPR Discussion Papers 3002, C.E.P.R. Discussion Papers.
  7. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc.
  8. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, August.
  9. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "New developments in models of search in the labor market," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 39, pages 2567-2627 Elsevier.
  10. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  11. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
  12. Marceau, Nicolas & Boadway, Robin, 1994. " Minimum Wage Legislation and Unemployment Insurance as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 67-81.
  13. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, August.
  14. Boadway, Robin & Cuff, Katherine, 2001. "A minimum wage can be welfare-improving and employment-enhancing," European Economic Review, Elsevier, vol. 45(3), pages 553-576, March.
  15. Feve, Patrick & Langot, Francois, 1996. "Unemployment and the business cycle in a small open economy: G.M.M. estimation and testing with French data," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1609-1639.
  16. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
  17. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  18. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  19. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  20. 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.
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