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A Politico-Economic Analysis of Minimum Wages and Wage Subsidies

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  • Antonis Adam
  • Thomas Moutos

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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1810.

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

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

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References

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  1. Andreas Knabe & Ronnie Schöb & Joachim Weimann, 2006. "Marginal Employment Subsidization: A New Concept and a Reappraisal," CESifo Working Paper Series 1707, CESifo Group Munich.
  2. James M. Poterba, 1999. "The Rate of Return to Corporate Capital and Factor Shares: New EstimatesUsing Revised National Income Accounts and Capital Stock Data," NBER Working Papers 6263, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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), Swiss Society of Economics and Statistics (SSES), vol. 136(III), pages 223-245, September.
  5. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  6. Sinn, Hans-Werner, 2000. "The threat to the German welfare state," Munich Reprints in Economics, University of Munich, Department of Economics 19861, University of Munich, Department of Economics.
  7. Ronnie Schöb und Joachim Weimann & Joachim Weimann, 2003. "Kombilohn: Die Magdeburger Alternative," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 4(1), pages 1-17, 02.
  8. J. Michael Orszag & Dennis J. Shower, 2000. "The Effectiveness of Employment Vouchers: A Simple Approach," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 1(4), pages 385-419, November.
  9. 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.
  10. Orszag, Jonathan Michael & Snower, Dennis J., 2000. "The effectiveness of employment vouchers : a simple approach," Open Access Publications from Kiel Institute for the World Economy 2519, Kiel Institute for the World Economy (IfW).
  11. Neumark, David & Wascher, William, 2007. "Minimum Wages and Employment," IZA Discussion Papers 2570, Institute for the Study of Labor (IZA).
  12. Orszag, J. Michael & Snower, Dennis J., 2003. "Designing employment subsidies," Labour Economics, Elsevier, vol. 10(5), pages 557-572, October.
  13. Cox, James C & Oaxaca, Ronald L, 1982. "The Political Economy of Minimum Wage Legislation," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 20(4), pages 533-55, October.
  14. Adam, Antonis & Moutos, Thomas, 2006. "Minimum wages, inequality and unemployment," Economics Letters, Elsevier, vol. 92(2), pages 170-176, August.
  15. Henry C. Simons, 1944. "Some Reflections on Syndicalism," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 52, pages 1.
  16. 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.
  17. Andreas Knabe, 2009. "Marginal wage subsidies: a rent-extracting instrument for employment creation," Journal of Economic Studies, Emerald Group Publishing, vol. 36(4), pages 393-410, September.
  18. Saint-Paul, Gilles, 2000. "The Political Economy of Labour Market Institutions," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198293323, October.
  19. Pinelopi Koujianou Goldbe & Giovanni Maggi, 1997. "Protection for Sale: An Empirical Investigation," NBER Working Papers 5942, National Bureau of Economic Research, Inc.
  20. Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 106(436), pages 639-49, May.
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Cited by:
  1. George Economides & Thomas Moutos, 2014. "Minimum Wages, Capital Accumulation and Worker's Incomes," CESifo Working Paper Series 4821, CESifo Group Munich.

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