Leveraging Wage Subsidies to Facilitate Fair Wages and Increase Social Welfare

38 Pages Posted: 25 Aug 2017

See all articles by Tomer Blumkin

Tomer Blumkin

Tel Aviv University - Eitan Berglas School of Economics; Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Haim Pinhas

Ben-Gurion University of the Negev

Ro'i Zultan

Ben-Gurion University of the Negev

Date Written: August 07, 2017

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.

Keywords: wage subsidies, welfare, gift exchange, tax incidence

JEL Classification: C920, H210, H220, H530, J330

Suggested Citation

Blumkin, Tomer and Pinhas, Haim and Zultan, Ro'i, Leveraging Wage Subsidies to Facilitate Fair Wages and Increase Social Welfare (August 07, 2017). CESifo Working Paper Series No. 6597. Available at SSRN: https://ssrn.com/abstract=3025302

Tomer Blumkin (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
+972 8 647 2268 (Phone)
+972 8 647 2941 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Haim Pinhas

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

Ro'i Zultan

Ben-Gurion University of the Negev ( email )

1 Ben-Gurion Blvd
Beer-Sheba 84105, 84105
Israel

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