Minimum Wages for the Deserving Poor

Minimum wages are used in most OECD countries as a redistributive tool for the benefit of low-skilled workers. However, they are highly controversial due to their adverse effect on employment, the magnitude of which has been the subject of an intense empirical debate. The availability of the tax-and-transfer system and other policy instruments to address concerns about earnings inequality raises a fundamental normative question regarding the social desirability of a minimum wage as a redistributive tool.

In his current research Leif Danziger, together with Tomer Blumkin, offer a novel justification for the use of a minimum wage to supplement an optimal tax-and-transfer system. Central to their argument is the distinction between the deserving and the undeserving poor, the former being individuals who are either willing to work hard or who are truly disabled, and the latter individuals who are perceived to be lazy.

They assume that the government maximises a social welfare function that exhibits a bias against the undeserving poor and that employment is rationed efficiently. The entire incidence of the involuntary underemployment triggered by the introduction of a minimum wage will then fall on the undeserving poor. Therefore, the extra transfers offered by the government to the low-skilled workers will be exclusively targeted toward those that are considered deserving rather than being accorded to all poor across the board. Thus, by relying on the screening of workers through the efficient labour market rationing mechanism, the government overcomes its inability to identify the deserving poor directly. Consequently, a minimum wage becomes a desirable supplement to the optimal tax-and-transfer system.

Leif Danziger is a Professor of Economics at Ben-Gurion University. His current research interests include the minimum wage, labour contracts, macroeconomic implications of adjustment costs and investment theory. He has published in the American Economic Review, European Economic Review, Journal of Labor Economics, Journal of Population Economics, Labour Economics, Quarterly Journal of Economics and other journals. Mr Danziger's PhD is from Yale University. He is a CESifo and an IZA a research fellow.