The Optimal Minimum Wage with Regulatory Uncertainty

Abstract

For two di¤erent regulatory standards, we examine the optimal minimum wage in a competitive labour market when the government is uncertain about supply and demand. Solutions are related to underlying supply and demand conditions, and to the extent of uncertainty and of rationing e¢ ciency. With expected earnings-maximization, greater uncertainty widens the range of parameter values for which a minimum wage should be set. With expected worker surplus-maximization and su¢ ciently e¢ cient rationing, a minimum wage should always be set. However, in both cases regulatory uncertainty may require a low minimum wage that may not bind in equilibrium.