A Pareto‐Improving Minimum Wage

17 Pages Posted: 7 Mar 2015

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 2015

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.

Suggested Citation

Danziger, Eliav and Danziger, Leif, A Pareto‐Improving Minimum Wage (April 2015). Economica, Vol. 82, Issue 326, pp. 236-252, 2015, Available at SSRN: https://ssrn.com/abstract=2574480 or http://dx.doi.org/10.1111/ecca.12119

Eliav Danziger (Contact Author)

Princeton University ( email )

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Leif Danziger

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

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Israel
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