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

Author

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  • Cahuc, Pierre

    (Sciences Po, 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 of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2955
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    References listed on IDEAS

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    More about this item

    Keywords

    optimal taxation; minimum wage; monopsony;
    All these keywords.

    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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