On the Optimality of a Minimum Wage: New Insights from Optimal Tax Theory

32 Pages Posted: 30 Aug 2007

See all articles by Mathias Hungerbühler

Mathias Hungerbühler

Catholic University of Louvain; Université Paris II - Panthéon-Assas - ERMES

Etienne Lehmann

CREST; Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES); IZA Institute of Labor Economics

Date Written: July 2007

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.

Keywords: optimal taxation, minimum wage, search-matching unemployment, bunching, wage bargaining

JEL Classification: D86, H21, H23, J64, J68

Suggested Citation

Hungerbühler, Mathias and Lehmann, Etienne, On the Optimality of a Minimum Wage: New Insights from Optimal Tax Theory (July 2007). IZA Discussion Paper No. 2957, Available at SSRN: https://ssrn.com/abstract=1010587 or http://dx.doi.org/10.2139/ssrn.1010587

Mathias Hungerbühler

Catholic University of Louvain ( email )

Place Montesquieu, 3
B-1348 Louvain-la-Neuve, 1348
Belgium

Université Paris II - Panthéon-Assas - ERMES

12 Place du Panthéon
Paris, Cedex 5, 75005
France

Catholic University of Louvain (UCL) - School of Economic and Social Research (IRES) ( email )

3, Place Montesquieu
1348 Louvain-la-Neuve
Belgium

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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