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The Optimum Minimum Wage When Labor Services are Taxed


  • Grimes, Mark
  • Tower, Edward


We consider an economy (e.g. Chile 1973-83) with a minimum wage sector and a free sector, and a tax on labor earnings. The supply of labor depends positively on the wage. Jobs in the minimum wage sector are allocated by lottery. In such a model a minimum wage may increase employment and output by drawing additional workers into employment. Without taxation the utility of increased output is more than balanced by the utility of decreased leisure. But in the presence of output or labor taxation, that is not necessarily the case. We use GAMS to find the optimum minimum wage for various parameter values.

Suggested Citation

  • Grimes, Mark & Tower, Edward, 1996. "The Optimum Minimum Wage When Labor Services are Taxed," Working Papers 96-13, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:96-13

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    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search


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