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

Listed author(s):
  • 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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  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. 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.
  4. 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.
  5. 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.
  6. 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.
  7. Joern-Steffen Pischke, 2004. "Labor Market Institutions, Wages and Investment," CESifo Working Paper Series 1278, CESifo Group Munich.
  8. 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, 03.
  9. repec:pri:cepsud:178lee is not listed on IDEAS
  10. 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.
  11. 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..
  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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