IDEAS home Printed from https://ideas.repec.org/p/mcm/deptwp/2017-15.html
   My bibliography  Save this paper

Optimal Design and Quantitative Evaluation of the Minimum Wage

Author

Listed:
  • Pau S. Pujolas
  • Zachary L. Mahone

Abstract

We study a labor market where firms have private information about their ex-ante heterogeneous productivities and search is random. In this environment, a binding minimum wage can be efficiency-enhancing - we show that setting it using a version of the Vickery-Clarke-Groves mechanism delivers full efficiency. In a dynamic, stochas-tic version of the model calibrated to the Routine Manual labor market in the U.S., our proposed mechanism generates sizeable welfare gains. The resulting minimum wage is procyclical, dampening the response of unemployment to aggregate shocks.

Suggested Citation

  • Pau S. Pujolas & Zachary L. Mahone, 2017. "Optimal Design and Quantitative Evaluation of the Minimum Wage," Department of Economics Working Papers 2017-15, McMaster University.
    • Handle: RePEc:mcm:deptwp:2017-15
    as

    Download full text from publisher

    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/McMasterEconWP2017-15.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Cortes, Guido Matias & Jaimovich, Nir & Nekarda, Christopher J. & Siu, Henry E., 2020. "The dynamics of disappearing routine jobs: A flows approach," Labour Economics, Elsevier, vol. 65(C).
    2. Ricardo Lagos, 2006. "A Model of TFP," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(4), pages 983-1007.
    3. 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.
    4. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-894, October.
    5. Christopher J. Flinn, 2006. "Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates," Econometrica, Econometric Society, vol. 74(4), pages 1013-1062, July.
    6. Gerard J. van den Berg, 2003. "Multiple Equilibria and Minimum Wages in Labor Markets with Informational Frictions and Heterogeneous Production Technologies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1337-1357, November.
    7. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
    8. Swinnerton, Kenneth A, 1996. "Minimum Wages in an Equilibrium Search Model with Diminishing Returns to Labor in Production," Journal of Labor Economics, University of Chicago Press, vol. 14(2), pages 340-355, April.
    9. Albrecht, James W & Axell, Bo, 1984. "An Equilibrium Model of Search Unemployment," Journal of Political Economy, University of Chicago Press, vol. 92(5), pages 824-840, October.
    10. Susan Athey & Ilya Segal, 2013. "An Efficient Dynamic Mechanism," Econometrica, Econometric Society, vol. 81(6), pages 2463-2485, November.
    11. Julien, Benoît & Mangin, Sephorah, 2017. "Efficiency of job creation in a search and matching model with labor force participation," Economics Letters, Elsevier, vol. 150(C), pages 149-151.
    12. Gorostiaga, Arantza & Rubio-Ramirez, Juan F., 2007. "Optimal minimum wage in a competitive economy: An alternative modelling approach," Economic Modelling, Elsevier, vol. 24(5), pages 778-796, September.
    13. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    14. Boadway, Robin & Cuff, Katherine, 1999. "A Minimum Wage can be Welfare-Improving and Employment-Enhancing," Queen's Economics Department Working Papers 273408, Queen's University - Department of Economics.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lavecchia, Adam M., 2020. "Minimum wage policy with optimal taxes and unemployment," Journal of Public Economics, Elsevier, vol. 190(C).
    2. Krolikowski, Pawel M. & McCallum, Andrew H., 2021. "Goods-market frictions and international trade," Journal of International Economics, Elsevier, vol. 129(C).
    3. 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.
    4. 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.
    5. David S. Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," Working Papers 1105, Princeton University, Department of Economics, Industrial Relations Section..
    6. Sergio A. Lago Alves, 2012. "Trend Inflation and the Unemployment Volatility Puzzle," Working Papers Series 277, Central Bank of Brazil, Research Department.
    7. Sergio A. Lago Alves, 2018. "Monetary Policy, Trend Inflation, and Unemployment Volatility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(4), pages 637-673, June.
    8. repec:pri:cepsud:178lee is not listed on IDEAS
    9. 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.
    10. Morvay, Endre, 2012. "Munkapiac keresési súrlódásokkal [Job-seeking on the labour market, with frictions]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(2), pages 139-163.
    11. Panagiotis Nanos, 2023. "Minimum wage spillover effects and social welfare in a model of stochastic job matching," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 25(4), pages 753-802, August.
    12. Erwin Ooghe, 2015. "Wage policies, employment, and redistributive efficiency," Working Papers 2015/42, Institut d'Economia de Barcelona (IEB).
    13. Gerard J. van den Berg, 2003. "Multiple Equilibria and Minimum Wages in Labor Markets with Informational Frictions and Heterogeneous Production Technologies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1337-1357, November.
    14. Arantza Gorostiaga & Juan F. Rubio-Ramirez, 2004. "Optimal minimum wage in a competitive economy," FRB Atlanta Working Paper 2004-30, Federal Reserve Bank of Atlanta.
    15. Tortorice, Daniel L., 2013. "Endogenous separation, wage rigidity and the dynamics of unemployment," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 179-191.
    16. Pinoli, Sara, 2008. "Rational Expectations and the Puzzling No-Effect of the Minimum Wage," MPRA Paper 11405, University Library of Munich, Germany.
    17. Petrosky-Nadeau, Nicolas & Wasmer, Etienne, 2015. "Macroeconomic dynamics in a model of goods, labor, and credit market frictions," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 97-113.
    18. Eckstein, Zvi & Ge, Suqin & Petrongolo, Barbara, 2006. "Job and Wage Mobility in a Search Model with Non-Compliance (Exemptions) with the Minimum Wage," IZA Discussion Papers 2076, Institute of Labor Economics (IZA).
    19. 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.
    20. Petra E. Todd & Weilong Zhang, 2022. "Distributional Effects of Local Minimum Wages: A Spatial Job Search Approach," PIER Working Paper Archive 22-027, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    21. Simon, Andrew & Wilson, Matthew, 2021. "Optimal minimum wage setting in a federal system," Journal of Urban Economics, Elsevier, vol. 123(C).

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mcm:deptwp:2017-15. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/demcmca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.