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A Politico-Economic Analysis of Minimum Wages and Wage Subsidies

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Author Info
Antonis Adam ()
Thomas Moutos ()

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Abstract

In 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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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 1810.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1810

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Related research
Keywords: minimum wages; wage subsidies; median voter; political economy;

Find related papers by JEL classification:
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February. [Downloadable!] (restricted)
  2. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May. [Downloadable!] (restricted)
  3. J. Michael Orszag & Dennis J. Shower, 2000. "The Effectiveness of Employment Vouchers: A Simple Approach," German Economic Review, Blackwell Publishing, vol. 1(4), pages 385-419, November. [Downloadable!] (restricted)
  4. Orszag, J. Michael & Snower, Dennis J., 2003. "Designing employment subsidies," Labour Economics, Elsevier, vol. 10(5), pages 557-572, October. [Downloadable!] (restricted)
  5. Juan J. Dolado & Florentino Felgueroso & Juan F. Jimeno, 2000. "The Role of the Minimum Wage in the Welfare State: An Appraisal," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 136(III), pages 223-245, September. [Downloadable!]
    Other versions:
  6. Pinelopi Koujianou Goldberg & Giovanni Maggi, 1999. "Protection for Sale: An Empirical Investigation," American Economic Review, American Economic Association, vol. 89(5), pages 1135-1155, December. [Downloadable!] (restricted)
    Other versions:
  7. Phelps, Edmund S, 1994. "Low-Wage Employment Subsidies versus the Welfare State," American Economic Review, American Economic Association, vol. 84(2), pages 54-58, May. [Downloadable!] (restricted)
  8. Sinn, Hans-Werner, 2000. "The Threat to the German Welfare State," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  9. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Cox, James C & Oaxaca, Ronald L, 1982. "The Political Economy of Minimum Wage Legislation," Economic Inquiry, Oxford University Press, vol. 20(4), pages 533-55, October.
  11. Ronnie Schöb und Joachim Weimann & Joachim Weimann, 2003. "Kombilohn: Die Magdeburger Alternative," Perspektiven der Wirtschaftspolitik, Blackwell Publishing, vol. 4(1), pages 1-17, 02. [Downloadable!] (restricted)
  12. Hans-Werner Sinn, 2005. "Migration and Social Replacement Incomes: How to Protect Low-Income Workers in the Industrialized Countries Against the Forces of Globalization and Market Integration," International Tax and Public Finance, Springer, vol. 12(4), pages 375-393, August. [Downloadable!] (restricted)
  13. David Neumark & William Wascher, 2007. "Minimum Wages and Employment," IZA Discussion Papers 2570, Institute for the Study of Labor (IZA). [Downloadable!]
  14. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2006. "Marginal Employment Subsidization: A New Concept and a Reappraisal," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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