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Wage Subsidies and Fair Wages

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  • Blumkin, Tomer
  • Pinhas, Haim
  • Zultan, Ro’i

Abstract

Wage subsidies can be provided directly to the worker, or indirectly by subsidizing the employer; with reduced cost of labor, employers offer higher wages. The standard literature stipulates that this statutory incidence bears no implications for the economic incidence. We propose and test a mechanism by which indirect subsidies lead to higher social welfare. Studies show that workers reciprocate higher wages with higher effort. Indirect subsidies are shifted to the workers as higher wages, leading workers to reciprocate with higher effort and productivity. A controlled laboratory experiment supports our behavioral hypotheses and confirms the behavioral and welfare implications.

Suggested Citation

  • Blumkin, Tomer & Pinhas, Haim & Zultan, Ro’i, 2020. "Wage Subsidies and Fair Wages," European Economic Review, Elsevier, vol. 127(C).
  • Handle: RePEc:eee:eecrev:v:127:y:2020:i:c:s0014292120301240
    DOI: 10.1016/j.euroecorev.2020.103497
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    More about this item

    Keywords

    Wage subsidies; Welfare; Gift exchange; Tax incidence; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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