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A Politico-Economic Analysis of Minimum Wages and Wage Subsidies

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  • Antonis Adam
  • Thomas Moutos

Abstract

In this paper we construct a political economy model in which minimum wages are determined according to the wishes of the median voter. Using the minimum wage scheme as the status quo, we show that the replacement of minimum wages by wage subsidies guaranteeing the same (pre-tax) level of income (achieved by the government supplementing the wage income of workers by a subsidy equal to the difference between the competitive wage rate and the minimum wage rate), is not likely to receive political support unless it is supplemented by increased taxation of profits (after-tax profits are also likely to increase). Moreover, we show that the likelihood of implementation of wage subsidies is undermined by the existence of a heterogeneous labour force.

Suggested Citation

  • Antonis Adam & Thomas Moutos, 2006. "A Politico-Economic Analysis of Minimum Wages and Wage Subsidies," CESifo Working Paper Series 1810, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1810
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    References listed on IDEAS

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    6. Andreas Knabe, 2009. "Marginal wage subsidies: a rent-extracting instrument for employment creation," Journal of Economic Studies, Emerald Group Publishing, vol. 36(4), pages 393-410, September.
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    Cited by:

    1. George Economides & Thomas Moutos, 2016. "Can Minimum Wages Raise Workers' Incomes in the Long Run?," CESifo Working Paper Series 5913, CESifo Group Munich.
    2. George Economides & Thomas Moutos, 2014. "Minimum Wages, Capital Accumulation and Worker's Incomes," CESifo Working Paper Series 4821, CESifo Group Munich.
    3. George Economides & Thomas Moutos, 2017. "Minimum Wages in the Presence of In-Kind Redistribution," CESifo Working Paper Series 6545, CESifo Group Munich.
    4. George Economides & Thomas Moutos, 2014. "Minimum Wages as a Redistributive Device in the Long Run," CESifo Working Paper Series 5052, CESifo Group Munich.

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    Keywords

    minimum wages; wage subsidies; median voter; political economy;

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