Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage?

Pierre Cahuc and Guy Laroque

No 2955, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We analyze optimal taxation in an economy with monopsonistic labor markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the opportunity costs of work, chooses a tax scheme implementing the second best allocation. We compare the optima in the competitive and monopsonistic environments. We find that the government can always implement the second best allocation of the competitive economy in the monopsonistic environment. The optimal tax schedule comprises employment subsidies financed by taxes on profits. In this setup, there is no room for a minimum wage.

Keywords: optimal taxation; minimum wage; monopsony (search for similar items in EconPapers)
JEL-codes: H31 J30 J42 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2007-07
New Economics Papers: this item is included in nep-lab, nep-ltv and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Published - pubished in: Journal of Public Economic Theory, 2014, 16 (2), 259–273.

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Related works:
Journal Article: Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage? (2014)
Working Paper: Optimal Taxation and Monopsonistic Labor Market: Does Monopsony justify the Minimum Wage? (2009)
Working Paper: Optimal Taxation and Monopsonistic Labour Market: Does Monopsony Justify the Minimum Wage? (2007)
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