Optimal Minimum Wage in a Competitive Economy

Resumen

This paper studies the use of a minimum wage law to implement the optimal redistribution policy when a distorting tax-transfer scheme is also available. We build a static general equilibrium model with a Ramsey planner making decisions on taxes, transfers, and minimum wage levels. Workers are assumed to di.er only in their productivity. We find that optimal redistribution may imply the use of only taxes and transfers, only a minimum wage or the proper combination of both policies. The key factor driving our results is the reaction of the demand for low skilled labor to the minimum wage law. Hence, an optimal minimum wage appears to be most likely when low skilled households are scarce, the complementarity between the two types of workers is large or the di.erence in productivity is small.