Optimal Labor Laws

Abstract

This paper develops a model where a benevolent constitutional planner has the ability to restrict the allocation space of citizens who are heterogeneous in productivity prior to the stochastic determination of a government responsible for structuring the tax system. It finds that limits on cross-sectional dispersion in hours worked can be used as a welfare-enhancing tool to discipline the behavior of elected officials who seek to maximize the objective of their respective constituencies by devising selfishly optimal tax regimes that favor idiosyncratic gains from redistribution over socially suboptimal distortions in the labor wedge. A model calibrated to key moments of the U.S. presidential elections and the Lorenz Curve is consistent with two empirical findings from cross-country data: a positive correlation between maximum workweek limits and skill dispersion, and a negative correlation between minimum wage laws and the proportionality of electoral voting systems.