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

Pierre Cahuc and Guy Laroque

No 6416, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze optimal taxation in an economy with monopsonistic labour 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: Minimum wage; Monopsony; Optimal taxation (search for similar items in EconPapers)
JEL-codes: H31 J30 J42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab and nep-pub
Date: 2007-08
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Related works:
Working Paper: Optimal Taxation and Monopsonistic Labor Market: Does Monopsony justify the Minimum Wage? (2009)
Working Paper: Optimal Taxation and Monopsonistic Labor Market: Does Monopsony Justify the Minimum Wage? (2007)
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