Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/34430 
Year of Publication: 
2007
Series/Report no.: 
IZA Discussion Papers No. 2955
Publisher: 
Institute for the Study of Labor (IZA), Bonn
Abstract: 
We analyze optimal taxation in an economy with monopsonistic labor markets. The individuals, whose only decisions are whether to work, or not, have heterogeneous productivities and opportunity costs of work. Given its preferences for redistribution, the government, which does not observe the opportunity costs of work, chooses a tax scheme implementing the second best allocation. We compare the optima in the competitive and monopsonistic environments. We find that the government can always implement the second best allocation of the competitive economy in the monopsonistic environment. The optimal tax schedule comprises employment subsidies financed by taxes on profits. In this setup, there is no room for a minimum wage.
Document Type: 
Working Paper

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