Emmanuel Saez

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This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly
competitive labor market. We show that a binding minimum wage – while leading to
unemployment – is nevertheless desirable if the government values redistribution toward
low wage workers and if unemployment induced by the minimum wage hits the lowest
surplus workers first. This result remains true in the presence of optimal nonlinear taxes
and transfers. In that context, a minimum wage effectively rations the low skilled labor
that is subsidized by the optimal tax/transfer system, and improves upon the second-best
tax/transfer optimum. When labor supply responses are along the extensive margin, a
minimum wage and low skill work subsidies are complementary policies; therefore, the
co-existence of a minimum wage with a positive tax rate for low skill work is always
(second-best) Pareto inefficient. We derive formulas for the optimal minimum wage (with
and without optimal taxes) as a function of labor supply and demand elasticities and
the redistributive tastes of the government. We also present some illustrative numerical

Year of Publication
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Citation Key
Lee, D., & Saez, E. (2008). Optimal Minimum Wage Policy in Competitive Labor Markets. Retrieved from http://arks.princeton.edu/ark:/88435/dsp019019s246g (Original work published October 2008)
Working Papers

Although economists acknowledge that various indicators of educational attainment (e.g., highest
grade completed, credentials earned) might serve as signals of a worker’s productivity, the practical
importance of education-based signaling is not clear. In this paper we estimate the signaling value
of a high school diploma, the most commonly held credential in the U.S. To do so, we compare the
earnings of workers that barely passed and barely failed high school exit exams, standardized tests
that, in some states, students must pass to earn a high school diploma. Since these groups should, on
average, look the same to firms (the only difference being that "barely passers" have a diploma while
"barely failers" do not), this earnings comparison should identify the signaling value of the diploma.
Using linked administrative data on earnings and education from two states that use high school exit
exams (Florida and Texas), we estimate that a diploma has little effect on earnings. For both states, we
can reject that individuals with a diploma earn eight percent more than otherwise-identical individuals
without one; combining the state-specific estimates, we can reject signaling values larger than five or six
percent. While these confidence intervals include economically important signaling values, they exclude
both the raw earnings difference between workers with and without a diploma and the regression-adjusted
estimates reported in the previous literature.

Year of Publication
Date Published
Publication Language
Citation Key
Card, D., Mas, A., Moretti, E., & Saez, E. (2010). Inequality at Work: The Effect of Peer Salaries on Job Satisfaction. Retrieved from http://arks.princeton.edu/ark:/88435/dsp01qj72p715n (Original work published September 2010)
Working Papers