Minimum wages and optimal taxes

The analysis of the impact of minimum wages is usually limited to empirical studies of the employment or unemployment elasticity. Theory is believed to be rather straightforward. In this respect, the work of David Lee and Emannuel Saez is refreshing. They study the interaction of a binding minimum wage with income tax policy and find that minimum wages are beneficial as long as taxes are sufficiently redistributive and the resulting rationing is efficient: the workers with the lowest surplus do not get jobs.

The analysis is perfomed within the context of optimal taxation theory and allows for non-linear taxation. Then, minimum wages essentilally become part of tax policy and they allow to disciminate by labor efficiency. This is essentially the argument that Pierre Cahuc and Guy Laroque have made: minimum wages become redundant once optimal taxes are in places, or you can assume minimum wages and optimal taxes will work around them.

The two papers have an important distinction. The first assumes perfect competition, the second monopolistic competition. As argued before on this blog, minimum wages can lead to monopolistic competition due to implicit collusion that they favor. So all in all, I am not sure the Lee and Saez results are that exciting...