In this paper we prove that a graduated minimum wage rate can provide a Pareto improvement of an optimal allocation with nonlinear taxation. The reason is that a graduated minimum wage rate makes it harder for the more productive workers to mimic the income of the less productive workers. We also show that in a utilitarian social welfare optimum, the graduated minimum wage rate increases the consumption of low-productivity workers. However, due to changes in their working hours, they do not necessarily gain in utility. We further establish several comparative-static results for the minimum wage rate in the social optimum. |
