On the optimality of a minimum wage: New insights from optimal tax theory

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. Résumé :Nous étudions théoriquement dans quelle mesure l'introduction d'un salaire minimum peut être une politique désirable en complément d'une fiscalité non-linéaire optimale des revenus. Nous traitons cette question dans un modèle où des frictions de recherche sur le marché du travail engendrent du chômage. Les travailleurs ont des productivités hétérogènes que le gouvernement n'observe pas. En revanche, il observe les salaires négociés, si bien qu'il doit résoudre un problème d'anti-sélection. Nous montrons que la mise en place d'un salaire minimum est optimale quand le pouvoir de négociation des travailleurs est « trop » bas. Néanmoins, si le gouvernement en a les moyens, il est préférable d'augmenter ce pouvoir de négociation.

A Pareto‐improving Minimum Wage

“…In the absence of optimal income taxation, a constant minimum wage may increase social welfare both in a competitive environment (Danziger 2009a;Lee and Saez 2012) 1 and in a monopsonistic environment (Robinson 1933). 2 Since search frictions and informational asymmetries may lead to monopsonistic features, a constant minimum wage may be rationalized with other types of labour markets if income taxation is not optimal (Rebitzer and Taylor 1995;Bhaskar and To 1999;Cahuc et al 2001;Bhaskar et al 2002;Manning 2003;Flinn 2006;Hungerb€ uhler and Lehmann 2009;Basu et al 2010). Additionally, politics, the power of unions and cultural factors may affect the setting of the minimum wage (Sobel 1999;Belot et al 2007;Boeri and Burda 2009;Brown 2009;Checchi and Garcia-Penalosa 2010;Aghion et al 2011;Boeri 2012).…”

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

“…The paper of Hungerbühler and Lehmann (), where the usefulness of the minimum wage is analyzed in a search and matching model, is an exception.…”

Is a Minimum Wage an Appropriate Instrument for Redistribution?

“…Even if our results indicate that a minimum wage might not be an appropriate instrument for redistribution, this literature suggests that minimum wages could still be desirable to reduce labormarket frictions. Notable studies include Hungerbühler and Lehmann (2009) and Cahuc and Laroque (2013), who both consider a minimum wage along with optimal taxes. Cahuc and Laroque (2013) show that a minimum wage is not useful to reduce monopsony problems on the labor market as long as the government has sufficient tax instruments at its disposal.…”

“…Cahuc and Laroque (2013) show that a minimum wage is not useful to reduce monopsony problems on the labor market as long as the government has sufficient tax instruments at its disposal. Hungerbühler and Lehmann (2009) do find a role for a minimum wage alongside optimal nonlinear labor income taxes if workers' bargaining power is inefficiently low and the government cannot directly control bargaining power.…”