A Politico-Economic Analysis of Minimum Wages and Wage Subsidies

Antonis Adam () and Thomas Moutos ()

No CESifo Working Paper No. 1810, CESifo Working Paper Series from CESifo GmbH

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.

Keywords: minimum wages; wage subsidies; median voter; political economy (search for similar items in EconPapers)
JEL-codes: D72 E24 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab, nep-mac and nep-pol
Date: Written 2006
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