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Duke Economics Working Paper #03-01

An Efficiency Enhancing Minimum Wage


Omer Gokcekus and Edward Tower

Abstract

We consider an economy (e.g., Chile 1973-83 or modern Turkey) with a minimum wage sector and a free sector, and a tax on labor earnings. We ask "Can a slightly binding minimum wage simultaneously raise tax revenue, employment, and economic efficiency?" We answer "Yes, if the elasticity of demand for labor in the minimum-wage sector exceeds the elasticity of demand in the free sector." The logical key is that the minimum wage draws high reservation-wage workers into the labor force, who give up untaxed leisure in exchange for taxed work and thereby increase revenue, employment and efficiency.

Keywords: Minimum wage; Employment; Economic efficiency

JEL: J31, J6

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