A Pareto-Improving Minimum Wage

28 Pages Posted: 26 Apr 2014

See all articles by Eliav Danziger

Eliav Danziger

Princeton University

Leif Danziger

Ben-Gurion University of the Negev - Department of Economics; IZA Institute of Labor Economics

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This paper shows that a graduated minimum wage, in contrast to a constant minimum wage, can provide a strict Pareto improvement over what can be achieved with an optimal income tax. The reason is that a graduated minimum wage requires high-productivity workers to work more to earn the same income as low-productivity workers, which makes it more difficult for the former to mimic the latter. In effect, a graduated minimum wage allows the low-productivity workers to benefit from second-degree price discrimination which increases their income.

Keywords: graduated minimum wage, Pareto improvement

JEL Classification: J30

Suggested Citation

Danziger, Eliav and Danziger, Leif, A Pareto-Improving Minimum Wage. IZA Discussion Paper No. 8123, Available at SSRN: https://ssrn.com/abstract=2429642

Eliav Danziger (Contact Author)

Princeton University ( email )

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Leif Danziger

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
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8-6472941 (Fax)

HOME PAGE: http://www.econ.bgu.ac.il/facultym/danziger/main.htm

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