Capital Tax, Minimum Wage, and Labor Market Outcomes

Alok Kumar (kumara@uvic.ca)

Review of Economic Dynamics, 2008, vol. 11, issue 1, 133-154

Abstract: Often an increase in the minimum wage is accompanied by a reduction in the capital tax. This paper analyzes the effects of interactions between the minimum wage and the capital tax in the general equilibrium framework. The analysis is conducted in an inter-temporal search model in which firms post wages. A (binding) minimum wage provides a lower support for the distribution of wages. The paper finds that the interaction of these two policy instruments significantly modify labor market outcomes and welfare cost. In the presence of a binding minimum wage, a decrease in the capital tax leads to an increase in wage dispersion. In contrast, when it is not binding, a lower capital tax may reduce the dispersion in wages. A binding minimum wage magnifies the positive effects of a lower capital tax on labor supply, employment, and output. It also enhances the welfare cost of capital tax. A policy change which involves an increase in the minimum wage and a fall in the capital tax such that employment level remains constant increases welfare and output. (Copyright: Elsevier)

Keywords: General equilibrium; Welfare; Capital tax; Labor supply; Minimum wage; Wage posting; Search; Dispersion of wages (search for similar items in EconPapers)
JEL-codes: E2 E6 J3 J6 (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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DOI: 10.1016/j.red.2007.06.005

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