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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.

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 9 (2009)
Issue (Month): 1 (November)
Pages: 1-24

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Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:51
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