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Leveraging Wage Subsidies to Facilitate Fair Wages and Increase Social Welfare

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  • Tomer Blumkin
  • Haim Pinhas
  • Ro'i Zultan

Abstract

Wage subsidies can be provided directly to the worker, as in the federal Earned Income Tax Credit (EITC) program. They can also be provided indirectly by subsidizing the employer; by reducing the cost of labor, employers are induced to offer higher wages. The standard literature stipulates that the identity of the entity that is statutorily entitled for the subsidy bears no implications for the economic incidence. We propose and test a mechanism by which indirect subsidies can lead to higher social welfare. A substantial empirical literature establishes that workers reciprocate gifts in the form of higher wages with the gift of exerting higher effort. Thus, if a wage subsidy is implemented by indirectly subsidizing employers, employers face a lower cost of labor and increase their wages, leading workers to reciprocate with higher effort and productivity than achieved by providing the equivalent direct subsidy. A controlled laboratory experiment supports our behavioral hypotheses and confirms the behavioral and welfare implications

Suggested Citation

  • Tomer Blumkin & Haim Pinhas & Ro'i Zultan, 2017. "Leveraging Wage Subsidies to Facilitate Fair Wages and Increase Social Welfare," CESifo Working Paper Series 6597, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6597
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    More about this item

    Keywords

    wage subsidies; welfare; gift exchange; tax incidence;

    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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