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Minimum Wage and Capital Taxes


  • The authors are grateful for useful comments from a referee and the participants at the 2012 Taipei–Tokyo–Hong Kong three-party conference at Tamkang University, the 2012 IEFS (China) Conference at Nankai University, the 2011 European Economics and Finance Society meeting in London, and the University of Macau. This research was started when Chao was at the Chinese University of Hong Kong and Yu was at the City University of Hong Kong.


Using a general equilibrium model, this paper examines the employment and welfare effects of minimum wages coupled with capital taxes in a small open economy. The individual and joint optimal policies for a minimum wage and capital taxes are derived and explained. Specifically, policy reform to introduce a minimum wage while lowering the capital tax can be justified for some economies, notably, Hong Kong.