"Optimal Fiscal Policy with Rationing in the Labor Market", Topics in Macroeconomics Vol. 5: No. 1, Article 17, 2005.

Abstract. This paper studies the implications for the optimal policy of introducing an exogenous minimum wage into a standard public finance model. We present a dynamic general equilibrium model with a Ramsey planner deciding about public spending, labor income taxes and debt. We 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 not too high minimum wages, the government will set taxes to reduce labor supply and avoid non desirable rationing. 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.

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