Is a Minimum Wage an Appropriate Instrument for Redistribution?

47 Pages Posted: 11 Feb 2014

See all articles by Aart Gerritsen

Aart Gerritsen

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Bas Jacobs

Erasmus University Rotterdam (EUR); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: January 31, 2014

Abstract

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

Suggested Citation

Gerritsen, Aart and Jacobs, Bas, Is a Minimum Wage an Appropriate Instrument for Redistribution? (January 31, 2014). CESifo Working Paper Series No. 4588. Available at SSRN: https://ssrn.com/abstract=2393889

Aart Gerritsen

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Bas Jacobs (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

PO Box 1738
Rotterdam, Zuid-Holland 3000 DR
Netherlands
+314081452 (Phone)

HOME PAGE: http://people.few.eur.nl/bjacobs

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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