Copyrights to papers in the Duke Economics Working Paper Archive remain with the authors or their assignees. Archive users may download papers and produce them for their own personal use, but downloading of papers for any other activity, including reposting to other electronic bulletin boards or archives, may not be done without the written consent of the authors.

Duke Economics Working Paper #04-02

An Efficiency Enhancing Minimum Wage


Omer Gokcekus*a and Edward Tower*b

Forthcoming in The Journal of Policy Reform, Spring 2004

a Seton Hall University and b Duke University

(Received November 2003; in final form January 2004)

Abstract

We consider an economy with a tax on all labor earnings. We discover that a slightly-binding minimum wage on one sector can enhance efficiency. The minimum wage attracts high-reservation wage workers into the minimum-wage sector. If the labor demand curve in the free sector is quite flat, the vast majority of workers displaced by the minimum wage find employment in the free sector, raising aggregate employment. This displacement of workers by the only slightly-binding minimum wage has negligible effects on efficiency. So efficiency and tax revenue rise as the minimum wage pulls labor out of untaxed leisure, where too much of the labor force is lurking, into taxed work.

Key Words: Minimum wage; Employment; Economic efficiency

JEL: J31, J6

Retrieve document:

26 pages

  Help on downloading documents