Optimal Fiscal Policy with Rationing in the Labor Market

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.

Optimal minimum wage in a competitive economy: An alternative modelling approach

“…Then, these three equations, equation (9), the resource constraint (13), and the following condition:…”

Second-best tax policy and natural resource management in growing economies

“…A common assumption in most macroeconomic applications of dynamic optimal taxation is that a single representative good is consumed at each date. This is the case in Lucas and Stokey (1983), Judd (1985Judd ( , 1999, Chamley (1986), Zhu (1992), Jones et al (1993Jones et al ( , 1997, Chari et al (1994), Lansing (1998, 2006), Aiyagari et al (2002), and Gorostiaga (2003Gorostiaga ( , 2005. In this case, the tax rate on all consumption goods available at a particular date are implicitly equal.…”

Optimal Fiscal Policy in a Multisector Model: The Price Consequences of Government Spending

“…3 3 Several papers have studied the properties and implications of the optimal policy when a public consumption good is assumed. Among them, Turnovsky (1996) studies the role of a tax on consumption in enhancing growth and welfare, Judd (1999) characterizes the optimal tax on capital in the long run, Gorostiaga (2003, 2005) describes the optimal policy under noncompetitive labor markets, and Cassou and Lansing (2006) study the effect of tax reforms in an endogenous growth model. Other papers introduce government spending in the model as a productive input.…”