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Government Welfare Policy Under a Skilled-Biased Technological Change

Author

Listed:
  • Michel Strawczynski
  • Oren Tirosh

Abstract

In a world where machines replace unskilled work, an active labor market policy—represented by the combination of an optimal Earned Income Tax Credit (EITC) and income maintenance for the unemployed—provides incentives to increase participation in the labor market and depresses wages for unskilled employees. In this paper, this policy is tested against the alternative of allowing unskilled workers to receive a means-tested basic income (MTBI), as recently adopted by Spain. For a liberal social planner (i.e., includes consumption and leisure in individual utility), the MTBI dominates the active labor market policy. For a conservative social planner (i.e., evaluates social welfare based on individual utility from consumption), the active labor market policy dominates the MTBI. The potential dynamic effects of active labor policy on labor supply were considered in a simulation using updated empirical estimates; it shows that this policy becomes preferable for both types of the social planner.

Suggested Citation

  • Michel Strawczynski & Oren Tirosh, 2022. "Government Welfare Policy Under a Skilled-Biased Technological Change," Public Finance Review, , vol. 50(5), pages 515-557, September.
  • Handle: RePEc:sae:pubfin:v:50:y:2022:i:5:p:515-557
    DOI: 10.1177/10911421221117713
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    More about this item

    Keywords

    machines; workers; EITC; means-tested basic income; skilled-biased technological change;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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