A BEJM Topics article.

Abstract

This 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.

Submitted: September 23, 2004 · Accepted: February 14, 2005 · Published: July 26, 2005

Originally published in Topics in Macroeconomics.

Recommended Citation

Gorostiaga, Arantza (2005) "Optimal Fiscal Policy with Rationing in the Labor Market," Topics in Macroeconomics: Vol. 5 : Iss. 1, Article 17.
Available at: http://www.bepress.com/bejm/topics/vol5/iss1/art17