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Optimal Design and Quantitative Evaluation of the Minimum Wage

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  • Pau S. Pujolas
  • Zachary L. Mahone

Abstract

We study a labor market where firms have private information about their ex-ante heterogeneous productivities and search is random. In this environment, a binding minimum wage can be efficiency-enhancing - we show that setting it using a version of the Vickery-Clarke-Groves mechanism delivers full efficiency. In a dynamic, stochas-tic version of the model calibrated to the Routine Manual labor market in the U.S., our proposed mechanism generates sizeable welfare gains. The resulting minimum wage is procyclical, dampening the response of unemployment to aggregate shocks.

Suggested Citation

  • Pau S. Pujolas & Zachary L. Mahone, 2017. "Optimal Design and Quantitative Evaluation of the Minimum Wage," Department of Economics Working Papers 2017-15, McMaster University.
    • Handle: RePEc:mcm:deptwp:2017-15
    as

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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/McMasterEconWP2017-15.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Minimum Wage Determination; Business-cycle; Vickrey-Clarke-Groves Auction;
    All these keywords.

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining

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