Capital Tax and Minimum Wage: Implications for the Dispersion of Wages

Alok Kumar ()

No 345, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper analyzes the general equilibrium effects of capital tax when there is a mandated minimum wage. The analysis is conducted in an inter-temporal search model in which firms post wages as in Burdett and Mortensen (1998). A(binding) minimum wage provides alower support for the distribution of wages. A decrease in capital tax leads to an increase in wage dispersion. In contrast, when the minimum wage is not binding, a lower capital tax reduces the dispersion in wages. A binding minimum wage also magnifies the positive effects of a lower capital tax on labor supply, employment, and output. The analysis suggests that a policy change which involves an increase in minimum wage and a fall in capital tax such that unemployment rate remains constant reduces dispersion of wages

Keywords: Labor market search; capital tax; minimum wage; labor supply; wage dispersion; wage posting; general equilibrium (search for similar items in EconPapers)
JEL-codes: E2 E6 J3 J4 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dge, nep-lab and nep-mac
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