On the Optimality of a Minimum Wage : New Insights from Optimal Tax Theory”

We build a theoretical model to study whether a minimum wage can be welfare-improving ifit is implemented in conjunction with an optimized nonlinear income tax. We consider thisissue in a framework where search frictions on the labor market generate unemployment.Workers differ in productivity. The government does not observe workers' productivity butonly their wages. Hence, the redistributive policy solves an adverse selection problem. Weshow that a minimum wage is optimal if the bargaining power of the workers is relativelylow. However, if the government controls the bargaining power, then it is preferable to set asufficiently high bargaining power.