Is a Minimum Wage an Appropriate Instrument for Redistribution?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We analyze the redistributional (dis)advantages of a minimum wage over income taxation in competitive labor markets, without imposing assumptions on the (in)efficiency of labor rationing. Compared to a distributionally equivalent tax change, a minimum-wage increase raises involuntary unemployment, but also raises skill formation as some individuals avoid unemployment. A minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labor rationing. We show that this critically depends on how labor rationing is distributed among workers. A necessary condition for the desirability of a minimum-wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment. We write this condition in terms of measurable sufficient statistics. Our empirical analysis suggests that a minimum-wage increase is undesirable in nearly all OECD countries. A reduction in the minimum wage, along with tax adjustments that keep net incomes constant, would yield a Pareto improvement. Terms of use: Documents inJEL: D61; H21; J21; J24; J38

Minimum Wage Policy with Optimal Taxes and Unemployment

“…The labor demand side of the economy, as well as the government's policy tools are identical to the model described earlier. This framework generalizes the model in Gerritsen and Jacobs (2016) in that it allows for search frictions as well as changes in education choices due to the minimum wage. 35 In this case, the form of ( 14) is the same except for an additional term that captures the tax revenue gains or losses due to changes in skill decisions because of the minimum wage.…”

“…Several papers have analyzed the combination of wage regulation and optimal income taxes under various assumptions about the micro-foundations of the labor market (Allen (1987), Guesnerie and Roberts (1987), Marceau and Boadway (1994), Boadway and Cuff (2001), Lee andSaez (2008, 2012), Hungerb ühler and Lehmann (2009), Gerritsen and Jacobs (2016)). In each of these papers, the minimum wage is desirable only if it alleviates the equity-efficiency tradeoff caused by redistributive income taxation.…”

“…Mathematically, this is equivalent to introducing a minimum wage while simultaneously increasing the tax liability for type-1 workers so that consumption (redistribution) is unchanged. This approach is adopted byGerritsen and Jacobs (2016) for the case of the minimum wage in a model in which the labor market is competitive. This approach is also common in the literature on the desirability of non-uniform commodity taxation(Saez (2002a)).…”

Wage Policies, Employment, and Redistributive Efficiency

“…In Lee and Saez (2012) minimum wages allow for more redistribution to subsidized low income workers by blocking other potential 6 Allen (1987) shows that minimum wages add no value to (i ) an optimal non-linear earnings tax scheme (ii ) absent other policy instruments in (iii ) a competitive labour market where (iv ) individuals choose along the intensive (labour e¤ort) margin. Conversely, minimum wages can be useful if ceteris paribus (i ) optimal income taxes are linear (Guesnerie andRoberts, 1987, Allen, 1987), (ii ) other instruments, like monitoring of job search and job o¤er acceptance, are available (Boadway andCu¤, 1999, 2001), (iii ) labour markets are not competitive, e.g., in case of search frictions (Hungerbühler and Lehmann, 2009) and monopsonistic labour markets (Cahuc and Laroque, 2014), and (iv ) individuals choose also along another margin, e.g., an extensive participation margin (Lee and Saez, 2012) or a skill formation margin (Gerritsen and Jacobs, 2014). 7 Full observability of wage rates avoids the so-called mixed observability assumption that according to Guesnerie and Roberts (1987, p. 498) limits the early literature on minimum wages and redistribution.…”