Deserving poor and the desirability of a minimum wage

Abstract

This paper provides a normative justification for the use of a minimum wage as a redistributive tool in a competitive labor market. We show that a government interested in improving the wellbeing of the deserving poor, while being less concerned with their undeserving counterparts, can use a minimum wage to enhance the efficiency of the tax-and-transfer system in attaining this goal.

Is a Minimum Wage an Appropriate Instrument for Redistribution?

“…Danziger and Danziger () find a useful role for the minimum wage if it can be combined with a policy that forces firms to hire a certain number of low‐skilled workers, even if their marginal productivity is below the minimum wage. Blumkin and Danziger () consider a case in which the government redistributes from ‘lazy’ to ‘hard‐working’ low‐skilled workers who earn the same wage rate, but vary in the number of hours that they work. They find that a minimum wage may function as a useful screening device if it reduces the labour hours of the lazy poor.…”

“…Thus if low‐skilled workers are heterogeneous, then earlier studies usually assume that rationing affects only individuals who have the lowest utility surplus of work (e.g. Boadway and Cuff ; Lee and Saez ; Blumkin and Danziger ). If low‐skilled workers are homogeneous, then earlier studies assume either that rationing takes place on the intensive margin (Allen ; Guesnerie and Roberts ), or that low‐skilled workers are indifferent between working and not working (Marceau and Boadway ).…”

Local labor markets and taste-based discrimination

“…Blumkin and Danziger (2014) show that this policy can be socially beneficial to supplement an optimal tax-and-transfer system. However, depending on the level of minimum wage, wage distribution is truncated for low productivity workers.…”

Is a Minimum Wage an Appropriate Instrument for Redistribution?

“…Danziger and Danziger (2015) find a useful role for the minimum wage if it can be combined with a policy that forces firms to hire a certain number of low-skilled workers, even if their marginal productivity is below the minimum wage. Blumkin and Danziger (2014) consider a case in which the government redistributes from 'lazy' to 'hard-working' low-skilled workers that earn the same wage rate, but vary in the number of hours they work. They find that a minimum wage is desirable if it reduces labor hours of the lazy, as this makes it harder for lazy individuals to mimic hard-working individuals.…”

“…The literature on minimum wages generally makes specific assumptions regarding labor rationing. Studies most often assume efficient rationing, which implies that labor rationing only affects individuals that have the lowest utility surplus of work (e.g., Marceau and Boadway, 1994;Lee and Saez, 2012;Blumkin and Danziger, 2014). In our model, this would imply that only individuals with ability close to either Θ 1 or Θ 3 are unable to find a low-skilled job, since they are indifferent between low-skilled employment on the one hand, and involuntary unemployment or high-skilled employment on the other.…”