A minimum wage can be welfare-improving and employment-enhancing

We examine whether minimum wages can fulfill a useful role as part of an op timal tax-transfer scheme. The government cannot observe household abilitie s, only their incomes, and is constrained to ensure that those working are at least as well-off as those not working. A minimum wage combined with the institutional features of typical welfare systems allows the incentive con straint to be severed at the ability level associated with the minimum wage . If such a scheme can be enforced, the government can increase the amount of redistribution from those working to those not working, and possibly low er the number of unemployed. (C) 2001 Elsevier Science B.V. All rights rese rved. JEL classification: H21; H23; J38.