Wage Rigidity or Fiscal Redistribution: The credibility Issue

Manon Domingues Dos Santos () and Etienne Lehmann ()

Economics Bulletin, 2012, vol. 32, issue 4, 2801-2807

Abstract: We show that lack of commitment in the policymaking process may explain the prevalence of the minimum wage to redistribute income, despite its negative impact on unemployment. In the absence of commitment, firms anticipate the government's willingness to use a minimum wage policy to reduce the tax collecting costs implied by fiscal transfers. This expectation leads to a reduction in the labor demand that generates unemployment.

Keywords: Unemployment; Inequality; Wage Rigidity; Credibility; Time Inconsistency (search for similar items in EconPapers)
JEL-codes: H2 J6 (search for similar items in EconPapers)
Date: 2012-10-09
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