Working Paper: CEPR ID: DP6416
Authors: Pierre Cahuc; Guy Laroque
Abstract: We analyze optimal taxation in an economy with monopsonistic labour markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the opportunity costs of work, chooses a tax scheme implementing the second best allocation. We compare the optima in the competitive and monopsonistic environments. We find that the government can always implement the second best allocation of the competitive economy in the monopsonistic environment. The optimal tax schedule comprises employment subsidies financed by taxes on profits. In this setup, there is no room for a minimum wage.
Keywords: Minimum Wage; Monopsony; Optimal Taxation
JEL Codes: H31; J30; J42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Optimal Taxation through Employment Subsidies (H21) | Improved Employment Outcomes (J68) |
| Monopsonistic Employers do not Justify Minimum Wage (J42) | Optimal Tax Schedule can Replace Minimum Wage Policies (H21) |
| Full Taxation of Profits (H29) | Second-Best Allocations Align with Competitive Economy (D61) |