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

Abstract

Abstract:Does monopsony on the labor market in itself justify the implementation of a minimum wage when it would not be used in a competitive economy? This issue is studied in a model of optimal taxation. We adopt a definition most favorable to the minimum wage: the minimum wage is useful whenever it can replace a non negligible part of the tax schedule. The minimum wage is useful to correct the inefficiencies associated with the monopsony when there is a single skill. But the minimum wage is not useful any more when there are a continuum of skills.

Wage Policies, Employment, and Redistributive Efficiency

“…2 8 Because case a is needed to justify minimum labour requirements and case b to justify minimum wages, one could similarly state that both results point in the direction of minimal labour rather than minimum wage controls. 22 …”

“…22 Adding wage controls as constraints to the problem cannot improve redistribution, at the contrary. Because wages are now policy instruments, wage controls would restrict them and would therefore be harmless at best, but clearly harmful if binding.…”

“…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.…”

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.…”

“…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. 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.…”