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Capital Tax and Minimum Wage: Implications for the Dispersion of Wages

Author

Listed:
  • Alok Kumar

    (Economics University of Victoria)

Abstract

This paper analyzes the general equilibrium effects of capital tax when there is a mandated minimum wage. The analysis is conducted in an inter-temporal search model in which firms post wages as in Burdett and Mortensen (1998). A(binding) minimum wage provides alower support for the distribution of wages. A decrease in capital tax leads to an increase in wage dispersion. In contrast, when the minimum wage is not binding, a lower capital tax reduces the dispersion in wages. A binding minimum wage also magnifies the positive effects of a lower capital tax on labor supply, employment, and output. The analysis suggests that a policy change which involves an increase in minimum wage and a fall in capital tax such that unemployment rate remains constant reduces dispersion of wages

Suggested Citation

  • Alok Kumar, 2006. "Capital Tax and Minimum Wage: Implications for the Dispersion of Wages," 2006 Meeting Papers 345, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:345
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    More about this item

    Keywords

    Labor market search; capital tax; minimum wage; labor supply; wage dispersion; wage posting; general equilibrium;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • J4 - Labor and Demographic Economics - - Particular Labor Markets

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