Labor-Supply Effects of Income, Income-Work, and Wage Subsidies

Abstract

Three subsidy schemes for income maintenance are analyzed for their static incentive effects on labor supply. A discussion and critique of regressivity in schemes such as the "income-work" subsidy is offered. The dynamic incentive effects, the costs and benefits, and the redistributive patterns of the schemes are treated with political and social as well as economic considerations. Special attention is devoted to the analysis of a wage subsidy, which has been neglected in the literature on maintenance. The new labor supply is derived for a wage subsidy, and the effect of the wage subsidy in "guaranteeing jobs" and an analogy to the employer subsidy are described. An attempt is made to exploit the static incentive advantages of the wage subsidy over the two income subsidies treated here. The workability of categorical and "self-categorizing" combined wage-and-income subsidy programs is opened for further research.

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