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The Optimum Minimum Wage When Labor Services are Taxed

Listed author(s):
  • 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.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 96-13.

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Date of creation: 1996
Publication status: Published in REVISTA INTERNAZIONALE DI SCIENZE ECONOMISCHE E COMMERCIALI, Vol. XLV, 1998, pages 209-217
Handle: RePEc:duk:dukeec:96-13
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Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097

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