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A Pareto‐improving Minimum Wage
Author(s) -
Danziger Eliav,
Danziger Leif
Publication year - 2015
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12119
Subject(s) - productivity , minimum wage , economics , pareto principle , wage , labour economics , pareto optimal , low wage , efficiency wage , work (physics) , constant (computer programming) , multi objective optimization , operations management , mathematics , computer science , mathematical optimization , engineering , macroeconomics , mechanical engineering , programming language
This paper shows that a graduated minimum wage, in contrast to a constant minimum wage, can provide a strict Pareto improvement over what can be achieved with an optimal income tax. The reason is that a graduated minimum wage requires high‐productivity workers to work more to earn the same income as low‐productivity workers, which makes it more difficult for the former to mimic the latter. In effect, a graduated minimum wage allows the low‐productivity workers to benefit from second‐degree price discrimination, which increases their income.