A Politico-Economic Analysis of Minimum Wages and Wage Subsidies
AbstractIn this paper we construct a political economy model in which minimum wages are determined according to the wishes of the median voter. Using the minimum wage scheme as the status quo, we show that the replacement of minimum wages by wage subsidies guaranteeing the same (pre-tax) level of income (achieved by the government supplementing the wage income of workers by a subsidy equal to the difference between the competitive wage rate and the minimum wage rate), is not likely to receive political support unless it is supplemented by increased taxation of profits (after-tax profits are also likely to increase). Moreover, we show that the likelihood of implementation of wage subsidies is undermined by the existence of a heterogeneous labour force.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1810.
Date of creation: 2006
Date of revision:
minimum wages; wage subsidies; median voter; political economy;
Other versions of this item:
- Adam, Antonis & Moutos, Thomas, 2011. "A politico-economic analysis of minimum wages and wage subsidies," Economics Letters, Elsevier, vol. 110(3), pages 171-173, March.
- NEP-ALL-2006-10-14 (All new papers)
- NEP-LAB-2006-10-14 (Labour Economics)
- NEP-MAC-2006-10-14 (Macroeconomics)
- NEP-POL-2006-10-14 (Positive Political Economics)
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