Minimum wage: Redistributive or discriminatory policy?

Abstract

The standard model of optimal minimum wage policy in a perfectly competitive labor market suggests that a positive tax rate on minimum wage income is Pareto inefficient. However, most countries with a minimum wage exhibit a positive tax rate for minimum wage income. This paper introduces discrimination of individuals that do not contribute to social welfare, typically individuals that do not participate in the political process, into the standard model. If a minimum wage is introduced for discriminatory purposes, a positive tax rate on minimum wage income can be compatible with optimal government policy. In the empirical part, we show that the approval of discrimination against foreigners in the labor market and the presence of a minimum wage are indeed positively correlated