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The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit


  • Malul Miki

    () (Ben Gurion University)

  • Luski Israel

    () (Ben Gurion University)


This paper evaluates the consequences of minimum wage (MW) and earned income tax credit (EITC) in a model with heterogeneous costs of investment in human capital. Our model studies the effects of a MW and an EITC on employment, productivity, and total output for two types of groups: those with a low cost of acquiring human capital and a long horizon of earnings (Type Ys); and those with a high cost of acquiring human capital and a short horizon of earnings (Type Os). We assume that Type Ys consider investing in human capital while Type Os have a certain predetermined level of human capital and do not consider changing it. Our model suggests that a government might consider imposing a MW exclusively for Type Y individuals and an EITC exclusively for Type O individuals. Some of the best effects of each policy would therefore be obtained and some of the worst consequences would be avoided.

Suggested Citation

  • Malul Miki & Luski Israel, 2009. "The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-24, November.
  • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:51

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    References listed on IDEAS

    1. Cahuc, Pierre & Michel, Philippe, 1996. "Minimum wage unemployment and growth," European Economic Review, Elsevier, vol. 40(7), pages 1463-1482, August.
    2. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-793, September.
    3. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
    4. Boadway, Robin & Cuff, Katherine, 2001. "A minimum wage can be welfare-improving and employment-enhancing," European Economic Review, Elsevier, vol. 45(3), pages 553-576, March.
    5. Jörn-Steffen Pischke, 2004. "Labor Market Institutions, Wages and Investment," CEP Discussion Papers dp0652, Centre for Economic Performance, LSE.
    6. Richard Blundell & Hilary W. Hoynes, 2004. "Has 'In-Work' Benefit Reform Helped the Labor Market?," NBER Chapters,in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 411-460 National Bureau of Economic Research, Inc.
    7. David S. Lee & Emmanuel Saez, 2008. "Optimal Minimum Wage Policy in Competitive Labor Markets," Working Papers 1105, Princeton University, Department of Economics, Industrial Relations Section..
    8. Emmanuel Saez, 2002. "Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1039-1073.
    9. Wiji Arulampalam & Alison L. Booth & Mark L. Bryan, 2004. "Training and the new minimum wage," Economic Journal, Royal Economic Society, vol. 114(494), pages 87-94, March.
    10. repec:pri:cepsud:178lee is not listed on IDEAS
    11. Neumark, David & Wascher, William, 2003. "Minimum wages and skill acquisition: another look at schooling effects," Economics of Education Review, Elsevier, vol. 22(1), pages 1-10, February.
    12. Agell, Jonas & Lommerud, Kjell Erik, 1997. "Minimum wages and the incentives for skill formation," Journal of Public Economics, Elsevier, vol. 64(1), pages 25-40, April.
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    Cited by:

    1. Kolm, Ann-Sofie & Tonin, Mirco, 2012. "In-Work Benefits and the Nordic Model," IZA Discussion Papers 7084, Institute for the Study of Labor (IZA).
    2. Axelrad, Hila & Luski, Israel & Malul, Miki, 2016. "Behavioral biases in the labor market, differences between older and younger individuals," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 60(C), pages 23-28.
    3. Miki, Malul & Yuval, Fany, 2011. "Using education to reduce the wage gap between men and women," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(4), pages 412-416, August.
    4. Miki Malul, 2012. "A Dynamic Brain Drain in Peripheral Regions," ERSA conference papers ersa12p230, European Regional Science Association.
    5. Miki Malul & Amir Shoham, 2015. "Local country attributes and the emergence of high tech clusters," International Economics and Economic Policy, Springer, vol. 12(4), pages 497-507, October.
    6. Malul Miki & Rosenboim Mosi & Shavit Tal & Tarba Shlomo Yedidia, 2011. "The Role of Employment Protection during an Exogenous Shock to an Economy," Global Economy Journal, De Gruyter, vol. 11(2), pages 1-14, July.
    7. repec:eee:jebusi:v:67:y:2013:i:c:p:67-76 is not listed on IDEAS
    8. Kolm, Ann-Sofie & Tonin, Mirco, 2015. "Benefits conditional on work and the Nordic model," Journal of Public Economics, Elsevier, vol. 127(C), pages 115-126.
    9. Carter Thomas J., 2011. "Training and Turnover with Equilibrium Unemployment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-23, March.

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