Minimum Wage Policy with Optimal Taxes and Unemployment

Using a search model, I derive formula that links the welfare gains from the minimum wage to its effect on low-skilled labor force participation and employment. This formula shows that the minimum wage is welfare improving if pushing the low-skilled labor market tightness downwards brings it closer to its efficient level. I estimate the causal effect of the minimum wage on low-skilled labor force participation and employment using federal and state minimum wage variation. I discuss the policy implications of my estimates when viewed through the lens of the marginal welfare gain formula