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An Efficiency Enhancing Minimum Wage

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  • Gokcekus, Omer
  • Tower, Edward

Abstract

We consider an economy (e.g., Chile 1973-83 or modern Turkey) with a minimum wage sector and a free sector, and a tax on labor earnings. We ask "Can a slightly binding minimum wage simultaneously raise tax revenue, employment, and economic efficiency?" We answer "Yes, if the elasticity of demand for labor in the minimum-wage sector exceeds the elasticity of demand in the free sector." The logical key is that the minimum wage draws high reservation-wage workers into the labor force, who give up untaxed leisure in exchange for taxed work and thereby increase revenue, employment and efficiency.

Suggested Citation

  • Gokcekus, Omer & Tower, Edward, 2003. "An Efficiency Enhancing Minimum Wage," Working Papers 03-01, Duke University, Department of Economics.
    • Handle: RePEc:duk:dukeec:03-01
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    References listed on IDEAS

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    1. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-793, September.
    2. repec:ucp:bkecon:9780226184890 is not listed on IDEAS
    3. Basch, Michael & Paredes-Molina, Ricardo D., 1996. "Are there dual labor markets in Chile?: empirical evidence," Journal of Development Economics, Elsevier, vol. 50(2), pages 297-312, August.
    4. Brown, Charles & Gilroy, Curtis & Kohen, Andrew, 1982. "The Effect of the Minimum Wage on Employment and Unemployment," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 487-528, June.
    5. Ira N. Gang & Edward Tower, 1990. "Allocating Jobs under a Minimum Wage: Queues vs. Lotteries," The Economic Record, The Economic Society of Australia, vol. 66(3), pages 186-194, September.
    6. William Wascher & David Neumark, 2000. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, American Economic Association, vol. 90(5), pages 1362-1396, December.
    7. Welch, Finis, 1974. "Minimum Wage Legislation in the United States," Economic Inquiry, Western Economic Association International, vol. 12(3), pages 285-318, September.
    8. repec:bla:ecorec:v:66:y:1990:i:194:p:186-94 is not listed on IDEAS
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    Cited by:

    1. Todd J. Barry, 2020. "The push for a U.S. living wage: Modeling for inflation, unemployment, both, or neither," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 68-105,106-.
    2. Luciano Fanti & Luca Gori, 2007. "Fertility, income and welfare in an OLG model with regulated wages," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 54(4), pages 405-427, December.

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    More about this item

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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