A Pareto-Improving Minimum Wage

27 Pages Posted: 15 May 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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Date Written: April 14, 2014

Abstract

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: J300

Suggested Citation

Danziger, Eliav and Danziger, Leif, A Pareto-Improving Minimum Wage (April 14, 2014). CESifo Working Paper Series No. 4762, Available at SSRN: https://ssrn.com/abstract=2436841

Eliav Danziger

Princeton University ( email )

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Leif Danziger (Contact Author)

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

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