The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit

Miki Malul and Luski Israel ()
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Luski Israel: Ben Gurion University

The B.E. Journal of Economic Analysis & Policy, 2009, vol. 9, issue 1, 24

Abstract: This paper evaluates the consequences of minimum wage (MW) and earned income tax credit (EITC) in a model with heterogeneous costs of investment in human capital. Our model studies the effects of a MW and an EITC on employment, productivity, and total output for two types of groups: those with a low cost of acquiring human capital and a long horizon of earnings (Type Ys); and those with a high cost of acquiring human capital and a short horizon of earnings (Type Os). We assume that Type Ys consider investing in human capital while Type Os have a certain predetermined level of human capital and do not consider changing it. Our model suggests that a government might consider imposing a MW exclusively for Type Y individuals and an EITC exclusively for Type O individuals. Some of the best effects of each policy would therefore be obtained and some of the worst consequences would be avoided.

Keywords: minimum wage (MW); earned income tax credit (EITC); human capital (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (13)

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DOI: 10.2202/1935-1682.1953

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