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

Author Info

Listed author(s):
  • Hungerbühler, Mathias

    ()

    (University of Namur)

  • Lehmann, Etienne

    ()

    (CRED, Université Panthéon Assas Paris 2)

Abstract

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

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2957.

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Length: 32 pages
Date of creation: Jul 2007
Publication status: published in: Journal of Public Economics, 2009, 93 (3-4), 464-481
Handle: RePEc:iza:izadps:dp2957
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Keywords: bunching; optimal taxation; minimum wage; search-matching unemployment; wage bargaining;

Other versions of this item:

Find related papers by JEL classification:
  • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
  • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
  • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
  • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
  • J68 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Public Policy

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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, 04.
  2. Dreze, Jacques H. & Gollier, Christian, 1993. "Risk sharing on the labour market and second-best wage rigidities," European Economic Review, Elsevier, vol. 37(8), pages 1457-1482, December.
  3. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
  4. Mathias Hungerbühler & Etienne Lehmann & Alexis Parmentier & Bruno Van Der Linden, 2006. "Optimal Redistributive Taxation in a Search Equilibrium Model," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 743-767.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  11. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, July.
  12. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
  13. David Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," NBER Working Papers 14320, National Bureau of Economic Research, Inc.
  14. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, July.
  15. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
  16. 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.
  17. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  18. Boone, Jan & Bovenberg, Lans, 2002. "Optimal labour taxation and search," Journal of Public Economics, Elsevier, vol. 85(1), pages 53-97, July.
  19. 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.
  20. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 279-298.
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