A Minimum Wage Can Be Welfare-improving And Employment-enhancing

Robin Boadway and Katherine Cuff

No 980, Working Paper from Economics Department, Queen's University

Abstract: We examine whether minimum wages can fulfill a useful role as part of an optimal nonlinear income tax scheme. In this setting, governments cannot observe household abilities, only their incomes. Redistributing according to income, the government is constrained by a set of incentive constraints. Firms, on the other hand, are able to identify abilities of workers. To exploit that, the government imposes a minimum wage. This will preclude firms from offering a job to anyone below the minimum wage. The use of the minimum wage policy combined with the institutional features of typical welfare systems allows the incentive constraints to be severed at the ability level associated with the minimum wage. If such a scheme can be enforced, the government can increase the amount of redistribution from those working to those not working. Moreover, the optimal minimum wage may actually lower the number of unemployed.

Keywords: Unemployment; Minimum Wage; Optimal Income Tax (search for similar items in EconPapers)
JEL-codes: H21 H23 J38 (search for similar items in EconPapers)
Pages: 40 pages
Date: 1999-02
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https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_980.pdf First version 1999 (application/pdf)

Related works:
Journal Article: A minimum wage can be welfare-improving and employment-enhancing (2001)
Working Paper: A Minimum Wage Can Be Welfare-Improving and Employment-Enhancing (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:980

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