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Optimal Minimum Wage

Listed author(s):
  • Arantza Gorostiaga
  • Juan F Rubio-Ramirez

This paper studies the optimality of a minimum wage law when it is used, jointly with a distortionary tax-transfer scheme, to redistribute income among agents with different marginal productivity. We build a dynamic and stochastic general equilibrium model with a Ramsey planner making decisions on distortionary taxes, transfers, debt and minimum wage levels. In the economy there are two types of households; a low skilled and a high skilled type. We find that the optimality of minimum wages depends on the elasticity of substitution between labor inputs in the production technology and the size of each group in the total population. The sign and size of the elasticity of labor supply play also a crucial role in the setting of optimal policies. Finally, when it is assumed that tax revenues finance not only transfers, but also public spending, the probability of an optimal minimum wage law increase

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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 302.

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Date of creation: 2004
Handle: RePEc:red:sed004:302
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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