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Optimal Fiscal Policy with Rationing in the Labor Market

Optimal Fiscal Policy with Rationing in the Labor Market AbstractThis 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The B E Journal of Macroeconomics de Gruyter

Optimal Fiscal Policy with Rationing in the Labor Market

Gorostiaga, Arantza
The B E Journal of Macroeconomics , Volume 5 (1): 1 – Jul 26, 2005
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Publisher
de Gruyter
Copyright
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
ISSN
1935-1690
eISSN
1534-5998
DOI
10.2202/1534-5998.1265
Publisher site
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Abstract

AbstractThis 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.

Journal

The B E Journal of Macroeconomics – de Gruyter

Published: Jul 26, 2005

Keywords: Ramsey problem; disequilibrium theory; minimum wage; involuntary unemployment

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