Aart Gerritsen: Is a minimum wage an appropriate instrument for redistribution?
OFS seminar. Dr. Aaart Gerritsen is a senior research fellow at the Max Planck institute for Tax law and public finance in Germany.
Dr. Gerritsen will present the paper «Is a minimum wage an appropriate instrument for redistribution?» coauthored with Bas Jacobs.
We analyze the redistributional (dis)advantages of a minimum wage over income taxation in competitive labor markets. In comparison to a distributionally equivalent tax change, a higher minimum wage reduces low-skilled labor demand. This yields involuntary unemployment and more skill formation as some workers move into high-skilled employment. We show that the desirability of a minimum wage critically depends on how unemployment is distributed among low- killed workers. A minimum wage is an appropriate instrument for redistribution if the welfare gains of more skill formation outweigh the welfare losses of larger unemployment. We derive a necessary condition based on sufficient statistics, which is calibrated using empirical estimates for the semi- lasticity of skill formation with respect to unemployment and OECD-data. A minimum wage is not an appropriate instrument for redistribution in nearly all countries in our sample. Decreasing the minimum wage, while neutralizing the distributional effects with tax adjustments, can yield Pareto improvements.