The Optimal Graduated Minimum Wage and Social Welfare
25 Pages Posted: 17 May 2018
Date Written: March 21, 2018
This paper analyzes the effects of introducing a graduated minimum wage in a model with optimal income taxation in which a government seeks to maximize social welfare. It shows that the optimal graduated minimum wage increases social welfare by increasing the low-productivity workers’ consumption and bringing it closer to the first-best. The paper also describes how the graduated minimum wage in a social welfare optimum depends on important economy characteristics such as the government’s revenue needs, the social-welfare weight of low-productivity workers, and the numbers and productivities of the different types of workers.
Keywords: graduated minimum wage, optimal income taxation, social welfare
JEL Classification: D600, H210, J300
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