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Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?

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  • Cahuc, Pierre

    () (Ecole Polytechnique, Paris)

  • Laroque, Guy

    () (Sciences Po, Paris)

Abstract

We analyze optimal taxation in an economy with monopsonistic labor markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the opportunity costs of work, chooses a tax scheme implementing the second best allocation. We compare the optima in the competitive and monopsonistic environments. We find that the government can always implement the second best allocation of the competitive economy in the monopsonistic environment. The optimal tax schedule comprises employment subsidies financed by taxes on profits. In this setup, there is no room for a minimum wage.

Suggested Citation

  • Cahuc, Pierre & Laroque, Guy, 2007. "Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?," IZA Discussion Papers 2955, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp2955
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    References listed on IDEAS

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    1. Pierre Cahuc & Guy Laroque, 2014. "Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 259-273, April.
    2. Paul Beaudry & Charles Blackorby & Dezsö Szalay, 2009. "Taxes and Employment Subsidies in Optimal Redistribution Programs," American Economic Review, American Economic Association, vol. 99(1), pages 216-242, March.
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    27. repec:pri:cepsud:178lee is not listed on IDEAS
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Minimum wages and optimal taxes
      by Economic Logician in Economic Logic on 2009-02-23 20:11:00

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    Cited by:

    1. Nicholas Lawson, 2014. "Taxing the Job Creators: Efficient Progressive Taxation with Wage Bargaining," AMSE Working Papers 1442, Aix-Marseille School of Economics, Marseille, France, revised Aug 2014.
    2. Sell, Friedrich L. & Ruf, Ernst K., 2014. "Anmerkungen zum Monopson am Arbeitsmarkt II," Working Papers in Economics 2014,1, Bundeswehr University Munich, Economic Research Group.
    3. repec:spr:jknowl:v:8:y:2017:i:2:d:10.1007_s13132-016-0434-0 is not listed on IDEAS
    4. Carlos da Costa, 2017. "Optimal Mirrleesian Taxation in Non-competitive Labor Markets," 2017 Meeting Papers 1207, Society for Economic Dynamics.
    5. Guillaume Wilemme, 2017. "Optimal Taxation to Correct Job Mismatching," Working Papers halshs-01531309, HAL.
    6. Costa, Carlos Eugênio da & Maestri, Lucas Jóver, 2015. "Optimal Mirrleesian taxation in non-competitive labor markets," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 775, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    7. Webber, Douglas A., 2015. "Firm market power and the earnings distribution," Labour Economics, Elsevier, vol. 35(C), pages 123-134.
    8. Danziger, Eliav & Danziger, Leif, 2018. "The Optimal Graduated Minimum Wage and Social Welfare," GLO Discussion Paper Series 188, Global Labor Organization (GLO).
    9. Pierre Cahuc & Guy Laroque, 2014. "Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(2), pages 259-273, April.
    10. Pierre Cahuc & Cette Gilbert & André Zylberberg, 2008. "Salaire minimum et bas revenus," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00638149, HAL.
    11. Hungerbühler, Mathias & Lehmann, Etienne, 2009. "On the optimality of a minimum wage: New insights from optimal tax theory," Journal of Public Economics, Elsevier, vol. 93(3-4), pages 464-481, April.
    12. Micheli, Martin, 2016. "Minimum wage: Redistributive or discriminatory policy?," Annual Conference 2016 (Augsburg): Demographic Change 145830, Verein für Socialpolitik / German Economic Association.
    13. 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.
    14. repec:hal:journl:halshs-00638149 is not listed on IDEAS

    More about this item

    Keywords

    optimal taxation; minimum wage; monopsony;

    JEL classification:

    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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