TY  - JOUR
AU  - Lee,David
AU  - Saez,Emmanuel
TI  - Optimal Minimum Wage Policy in Competitive Labor Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14320
PY  - 2008
Y2  - September 2008
UR  - http://www.nber.org/papers/w14320
L1  - http://www.nber.org/papers/w14320.pdf
N1  - Author contact info:
David Lee
Industrial Relations Section
Princeton University
Firestone Library A-16-J
Princeton, NJ 08544
Tel: 609/258-9548
Fax: 609/258-2907
E-Mail: davidlee@princeton.edu

Emmanuel Saez
Department of Economics
University of California, Berkeley
530 Evans Hall #3880
Berkeley, CA 94720
Tel: 510/642-4631
Fax: 510/642-6615
E-Mail: saez@econ.berkeley.edu
AB  - This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market. We show that a binding minimum wage -- while leading to unemployment -- is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. This result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a minimum wage effectively rations the low skilled labor that is subsidized by the optimal tax/transfer system, and improves upon the second-best tax/transfer optimum. When labor supply responses are along the extensive margin, a minimum wage and low skill work subsidies are complementary policies; therefore, the co-existence of a minimum wage with a positive tax rate for low skill work is always (second-best) Pareto inefficient. We derive formulas for the optimal minimum wage (with and without optimal taxes) as a function of labor supply and demand elasticities and the redistributive tastes of the government. We also present some illustrative numerical simulations.
ER  -