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

Author

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  • Malul Miki

    (Ben Gurion University)

  • Luski Israel

    (Ben Gurion University)

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.

Suggested Citation

  • Malul Miki & Luski Israel, 2009. "The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-24, November.
    • Handle: RePEc:bpj:bejeap:v:9:y:2009:i:1:n:51
    DOI: 10.2202/1935-1682.1953
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    References listed on IDEAS

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    7. Neumark, David & Wascher, William, 2003. "Minimum wages and skill acquisition: another look at schooling effects," Economics of Education Review, Elsevier, vol. 22(1), pages 1-10, February.
    8. Lee, David & Saez, Emmanuel, 2012. "Optimal minimum wage policy in competitive labor markets," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 739-749.
    9. Wiji Arulampalam & Alison L. Booth & Mark L. Bryan, 2004. "Training and the new minimum wage," Economic Journal, Royal Economic Society, vol. 114(494), pages 87-94, March.
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    12. repec:adr:anecst:y:2002:i:67-68:p:12 is not listed on IDEAS
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    Cited by:

    1. Kolm, Ann-Sofie & Tonin, Mirco, 2012. "In-Work Benefits and the Nordic Model," IZA Discussion Papers 7084, Institute of Labor Economics (IZA).
    2. Axelrad, Hila & Luski, Israel & Malul, Miki, 2016. "Behavioral biases in the labor market, differences between older and younger individuals," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 60(C), pages 23-28.
    3. Miki, Malul & Yuval, Fany, 2011. "Using education to reduce the wage gap between men and women," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(4), pages 412-416, August.
    4. Miki Malul, 2012. "A Dynamic Brain Drain in Peripheral Regions," ERSA conference papers ersa12p230, European Regional Science Association.
    5. Miki Malul & Amir Shoham, 2015. "Local country attributes and the emergence of high tech clusters," International Economics and Economic Policy, Springer, vol. 12(4), pages 497-507, October.
    6. Malul Miki & Rosenboim Mosi & Shavit Tal & Tarba Shlomo Yedidia, 2011. "The Role of Employment Protection during an Exogenous Shock to an Economy," Global Economy Journal, De Gruyter, vol. 11(2), pages 1-14, July.
    7. repec:eee:jebusi:v:67:y:2013:i:c:p:67-76 is not listed on IDEAS
    8. Kolm, Ann-Sofie & Tonin, Mirco, 2015. "Benefits conditional on work and the Nordic model," Journal of Public Economics, Elsevier, vol. 127(C), pages 115-126.
    9. Hila Axelrad & Miki Malul & Israel Luski, 2018. "Unemployment among younger and older individuals: does conventional data about unemployment tell us the whole story?," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 52(1), pages 1-12, December.
    10. Michel Strawczynski, 2020. "Optimal EITC in the Presence of Cultural Barriers for Labor Market Participation," Journal of Labor Research, Springer, vol. 41(3), pages 233-259, September.
    11. Carter Thomas J., 2011. "Training and Turnover with Equilibrium Unemployment," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-23, March.

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