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Is a Minimum Wage an Appropriate Instrument for Redistribution?

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  • Aart Gerritsen
  • Bas Jacobs

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.

Suggested Citation

  • Aart Gerritsen & Bas Jacobs, 2014. "Is a Minimum Wage an Appropriate Instrument for Redistribution?," CESifo Working Paper Series 4588, CESifo.
    • Handle: RePEc:ces:ceswps:_4588
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    Cited by:

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    2. Lavecchia, Adam M., 2020. "Minimum wage policy with optimal taxes and unemployment," Journal of Public Economics, Elsevier, vol. 190(C).
    3. Simon, Andrew & Wilson, Matthew, 2021. "Optimal minimum wage setting in a federal system," Journal of Urban Economics, Elsevier, vol. 123(C).
    4. Sy, Deborah Kim & Hosoe, Nobuhiro, 2023. "Consequences of a minimum wage increase in a migrant-sending country," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1057-1066.
    5. Liu, Yan & Chen, Minjie & Yu, Jianyu & Wang, Xiaobing, 2024. "Being a happy farmer: Technology adoption and subjective well-being," Journal of Economic Behavior & Organization, Elsevier, vol. 221(C), pages 385-405.
    6. Hummel, Albert Jan & Jacobs, Bas, 2023. "Optimal income taxation in unionized labor markets," Journal of Public Economics, Elsevier, vol. 220(C).
    7. Gerritsen, Aart, 2017. "Equity and efficiency in rationed labor markets," Journal of Public Economics, Elsevier, vol. 153(C), pages 56-68.

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    More about this item

    Keywords

    minimum wage; optimal redistribution; unemployment; education;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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