Is a Minimum Wage an Appropriate Instrument for Redistribution?
47 Pages Posted: 11 Feb 2014
Date Written: January 31, 2014
We analyze the redistributive (dis)advantages of a minimum wage over income taxation in competitive labor markets. A minimum wage causes more unemployment, but also leads to more skill formation as unemployment is concentrated on low-skilled workers. A simple condition based on three sufficient statistics shows that a minimum wage is desirable if the social welfare gains of more skill formation outweigh the social welfare losses of increased unemployment. Using a highly conservative calibration, a minimum wage decrease is shown to be part of a Pareto-improving policy reform for all countries under consideration, except possibly the United States.
Keywords: minimum wage, optimal redistribution, unemployment, education
JEL Classification: D600, H210, H240, J210, J240, J380
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