Minimum Wage Policy with Optimal Taxes and Unemployment
Adam Lavecchia ()
No 1801E, Working Papers from University of Ottawa, Department of Economics
This paper sheds new light on the desirability of the minimum wage in the presence of an optimal non-linear income tax. Using a search-and-matching framework, I derive a novel condition that links the desirability of the minimum wage to three sufficient statistics: (1) the macro or general equilibrium labor force participation response to the minimum wage by low-skilled individuals; (2) the macro employment response to the minimum wage for low-skilled individuals; and (3) the welfare weight on low-skilled workers. This condition shows that the minimum wage is welfare improving if it pushes the labor market tightness – the ratio of the aggregate number of vacancies to low-skilled job seekers – closer to its efficient level. Guided by the theory, I estimate the first two sufficient statistics using an event study design, as well as state and federal minimum wage variation between 1979-2014. I estimate a macro participation elasticity of -0.24 and a macro employment elasticity of -0.32. The former represents new evidence on a previously overlooked margin of the minimum wage. With these estimates in hand, I simulate the total welfare gains from introducing a minimum wage beginning from the optimal income tax allocation. The simulations show that the minimum wage is welfare improving only if the government has very strong redistributive tastes.
Keywords: Minimum wage; Sufficient statistics; Optimal policy; Labor force participation (search for similar items in EconPapers)
JEL-codes: H21 H23 J21 J38 J64 (search for similar items in EconPapers)
Pages: 81 pages
New Economics Papers: this item is included in nep-lma, nep-pbe and nep-pub
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Journal Article: Minimum wage policy with optimal taxes and unemployment (2020)
Working Paper: Minimum Wage Policy with Optimal Taxes and Unemployment (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ott:wpaper:1801e
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