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Getting It Right: Employment Subsidy or Minimum Wage?

Author

Listed:
  • Strobl, Eric

    (University of Bern)

  • Walsh, Frank

    (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.

Suggested Citation

  • Strobl, Eric & Walsh, Frank, 2002. "Getting It Right: Employment Subsidy or Minimum Wage?," IZA Discussion Papers 662, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp662
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    References listed on IDEAS

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    5. Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-273, May.
    6. Kenneth A. Couch & David C. Wittenburg, 2001. "The Response of Hours of Work to Increases in the Minimum Wage," Southern Economic Journal, John Wiley & Sons, vol. 68(1), pages 171-177, July.
    7. Bhaskar, V & To, Ted, 1999. "Minimum Wages for Ronald McDonald Monopsonies: A Theory of Monopsonistic Competition," Economic Journal, Royal Economic Society, vol. 109(455), pages 190-203, April.
    8. Brown, Charles, 1999. "Minimum wages, employment, and the distribution of income," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 32, pages 2101-2163, Elsevier.
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    Cited by:

    1. Strobl, Eric & Walsh, Frank, 2007. "Dealing with monopsony power: Employment subsidies vs. minimum wages," Economics Letters, Elsevier, vol. 94(1), pages 83-89, January.
    2. Strobl, Eric & Walsh, Frank, 2007. "Estimating the shirking model with variable effort," Labour Economics, Elsevier, vol. 14(3), pages 623-637, June.
    3. Gilles Mourre, 2005. "Wage compression and employment in Europe: First evidence from the structure of earnings survey 2002," European Economy - Economic Papers 2008 - 2015 232, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    4. Ms. Magda E. Kandil & Mrs. Genevieve M Lindow & Mr. Mario Mansilla & Mr. Joel Chiedu Okwuokei & Jochen M. Schmittmann & Qiaoe Chen & Xin Li & Marika Santoro & Solomon Stavis, 2014. "Labor Market Issues in the Caribbean: Scope to Mobilize Employment Growth," IMF Working Papers 2014/115, International Monetary Fund.

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    More about this item

    Keywords

    minimum wage; working conditions; monopsony models;
    All these keywords.

    JEL classification:

    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs

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