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Journal of Public Economics

Optimal minimum wage policy in competitive labor marketsDavid Leea, Emmanuel Saezb, aDepartment of Economics , Princeton University, Industrial Relations Section, Firestone Library A-16-J-1, Princeton, NJ 08544, USAbUniversity of California, Department of Economics , 530 Evans Hall #3880, Berkeley, CA 94720, USAabstractarticle infoArticle history:Received 21 September 2011 Received in revised form 21 May 2012 Accepted 1 June 2012 Available online 9 June 2012 Keywords:Minimum wageOptimal taxationThis paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labormarket and obtains two key results. First, we show that a binding minimum wage while leading to unem-ployment is nevertheless desirable if the government values redistribution toward low wage workers and ifunemployment induced by the minimum wage hits the lowest surplus workersfirst.

minimum wage enhances the effectiveness of transfers to low-skilled workersasitpreventslow-skilledwagesfromfallingthroughincidence effects. This result can …

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