Optimal Fiscal Policy with Rationing in the Labor Market

Arantza Gorostiaga ()
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Arantza Gorostiaga: Universidad del País Vasco, http://www.ehu.es/agorostiaga/

No E2004/10, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: This paper studies the implications for the optimal policy of introducing an exogenous minimum wage into a standard public finance model. We present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor income taxes and debt. We find that, for sufficiently high minimum wages, equilibria in which the labor supply is rationed and involuntary unemployment arises may be optimal in bad times. For not too high minimum wages, the government will set taxes to reduce labor supply and avoid non desirable rationing. As regards the cyclical properties of the optimal policy, state contingent returns on debt are used as shock absorbers so as to smooth private consumption over time and across states of nature.

Keywords: Ramsey problem; disequilibrium theory; minimum wage; involuntary unemployment (search for similar items in EconPapers)
JEL-codes: C6 E62 H21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2004
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (8)

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