Getting it Right: Employment Subsidy or Minimum Wage?

37 Pages Posted: 31 Jan 2003 Last revised: 9 May 2025

See all articles by Eric Strobl

Eric Strobl

École Polytechnique, Paris - Department of Economic Sciences; IZA Institute of Labor Economics

Frank Walsh

National University of Ireland - University College Dublin

Abstract

In monopsony models of the labour market either a minimum wage or an employment subsidy financed by a lump sum tax on profits can achieve the efficient level of employment and output. Incorporating working conditions into a monopsony model where higher wages raise firm labour supply, but less attractive working conditions reduce it, changes these policy implications. Specifically, a minimum wage policy could, in contrast to an employment subsidy, cause working conditions to deteriorate and welfare to fall. Empirical evidence from the Republic of Trinidad and Tobago shows that a minimum wage may indeed cause working conditions to worsen.

Keywords: minimum wage, working conditions, monopsony models

JEL Classification: J2, J3

Suggested Citation

Strobl, Eric and Walsh, Frank, Getting it Right: Employment Subsidy or Minimum Wage?. IZA Discussion Paper No. 662, Available at SSRN: https://ssrn.com/abstract=372468

Eric Strobl

École Polytechnique, Paris - Department of Economic Sciences ( email )

Ecole Polytechnique
Department of Economics
Paris, 75005
France

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Frank Walsh (Contact Author)

National University of Ireland - University College Dublin ( email )

Department of Economics
Belfield
Dublin 4
Ireland
353-1-7068697 (Phone)
353-1-2830068 (Fax)

HOME PAGE: http://www.ucd.ie/~economic/staff/fwalsh/

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