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- Publisher
- de Gruyter
- Copyright
- ©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
- ISSN
- 1935-1690
- eISSN
- 1534-5998
- DOI
- 10.2202/1534-5998.1265
- Publisher site
- See Article on Publisher Site
Abstract
AbstractThis paper studies the implications for the optimal policy of introducing an exogenous minimum wage into a standard public finance model. I present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor income taxes and debt. I find that for sufficiently high minimum wages, equilibria in which the labor supply is rationed and involuntary unemployment arises may be optimal in bad times. For a minimum wage not too high, the government will set taxes to reduce the labor supply and avoid non desirable rationing. This implies increasing taxes in bad times. As regards the cyclical properties of the optimal policy, state contingent returns on debt are used as shock absorbers so as to smooth private consumption over time and across states of nature.
Journal
The B E Journal of Macroeconomics – de Gruyter
Published: Jul 26, 2005
Keywords: Ramsey problem; disequilibrium theory; minimum wage; involuntary unemployment