Is a Minimum Wage an Appropriate Instrument for Redistribution?

We analyse the redistributional (dis)advantages of a minimum wage over income taxation in competitive labour markets without imposing assumptions on the (in)efficiency of labour rationing. Compared to a distributionally equivalent tax change, a minimum‐wage increase raises involuntary unemployment,...

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Bibliographic Details
Published inEconomica (London) Vol. 87; no. 347; pp. 611 - 637
Main Authors Gerritsen, Aart, Jacobs, Bas
Format Journal Article
LanguageEnglish
Published London Blackwell Publishing Ltd 01.07.2020
Subjects
Income taxes
Involuntary
Labor market
Minimum wage
Rationing
Redistribution
Revenue
Statistics
Taxation
Unemployment
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Summary:We analyse the redistributional (dis)advantages of a minimum wage over income taxation in competitive labour markets without imposing assumptions on the (in)efficiency of labour rationing. Compared to a distributionally equivalent tax change, a minimum‐wage increase raises involuntary unemployment, but also raises skill formation as some individuals avoid unemployment. A minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labour rationing. We show that this critically depends on how labour rationing is distributed among workers. A necessary condition for the desirability of a minimum‐wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment. We write this condition in terms of measurable sufficient statistics.
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ISSN:0013-0427
1468-0335
DOI:10.1111/ecca.12323