Minimum Wage: Redistributive or Discriminatory Policy?
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 minimum wage legislation exhibit a positive tax rate on minimum wage income. We solve this alleged puzzle by introducing 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 minimum wages serve 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 share of inhabitants approving of labor market discrimination against immigrants and against women is positively related to the presence of minimum wage legislation in the respective country.