A few days ago, this comment was at something like +22. Now it’s at +9. It seems a few people strongly disagree with my recommendations. I’m curious if anyone would be willing to tell me why they disagree (though I’m most interested in disagreement with 1-4, as I admitted number 5 was “probably the weakest one on my list”).
I didn’t downvote, but I’m curious about #4. In my country I believe ‘wage subsidy’ refers to limited-time payments given to employers who hire people from certain categories (e.g. long-term unemployed). They’re framed as help with the initial costs of hiring, and are capped at a reasonably small amount. So it’s not obvious to me how they could be an uncontroversially good replacement for the minimum wage.
In my country I believe ‘wage subsidy’ refers to limited-time payments given to employers who hire people from certain categories (e.g. long-term unemployed).
I don’t know how the term wage subsidy is used everywhere, but I’m referring to a simpler concept.
Let’s say the government passes a law that says, “If you get a job, then we will pay you (through taxes) $15 for each hour that you work, which will be added to your wages.” This would have a very similar effect to the minimum wage. Let’s say that you apply to a ton of jobs, and your best offer offers a wage-rate of $1 an hour. If you take that job, you’ll earn $1 + $15 = $16 an hour, including the wage subsidies. In effect, the wage subsidy puts a floor on the hourly wage you can get for your work.
In practice, a wage subsidy is often given to employers, not employees (probably because it’s easier to do so). However, theoretical supply and demand models imply that this has the same effect as giving the money directly to the worker. Here’s why.
Imagine you’re an employer and you’re trying to hire people. You know that for each person you hire, you’ll get an extra $15 an hour for their labor. This makes you really interested in hiring labor. If someone asks for $16 an hour, then even if normally you’d value their labor at only $1 an hour, the deal is still worth it for you, because you’d pay $16 an hour, get $1 an hour worth of labor, and $15 from the government, yielding the same deal as before.
The amount that workers end up benefiting relative to employers in this framework is called the economic incidence. Real world studies estimating the incidence of wage taxes and wage subsidies generally find that it falls heavily on the workers, which justifies us believing that a wage subsidy would be beneficial to workers.
But why would a wage subsidy be better than the minimum wage? By definition, the minimum wage is a price floor on labor. Consider other markets for a second: imagine we put a price floor on a pound of rice, say $50. This would mean that you can’t sell a pound of rice for less than $50. This would have the effect of making rice a lot more expensive, which would be good for many rice-producers (just as a minimum wage is good for many workers). However, it will also mean that a ton of people will just stop eating rice, because they’d rather eat more affordable foods. Thus, the quantity supplied for rice will fall, ultimately pushing many rice-producers out of the industry, and making many people to stop eating rice (even though they’d eat it if it were cheaper).
Similarly, a (sufficiently high) minimum wage reduces the quantity of labor supplied, raising unemployment (with exceptions, such as in the famous monopsony model). Wage subsidies don’t have this effect, and as a bonus, we can choose whatever tax we think is best to fund it (as opposed to minimum wages, whose costs necessarily fall on specific employers).
Even in cases where a minimum wage doesn’t raise unemployment, there don’t seem to be compelling reasons why a wage subsidy would be worse, though some obscure arguments for this position are sometimes made. Here’s a video comparing wage subsidies to the minimum wage.
Got it, thanks. I haven’t watched the video you linked, but the first thing that comes to mind is the bureaucratic task of determining what qualifies as a legitimate, subsidisable job. If the eligibility criteria are generous and/or enforcement is lax, there will presumably be a lot of bullshit jobs (in both the ‘not actually real’ and ‘real but pointless’ senses) created just to claim the subsidy. Whereas a relatively strict system might have pretty high administrative costs, and would probably reject some deserving applicants.
If the eligibility criteria are generous and/or enforcement is lax, there will presumably be a lot of bullshit jobs (in both the ‘not actually real’ and ‘real but pointless’ senses) created just to claim the subsidy.
Yeah, I agree with this critique. It’s worth noting that the United States already implements a wage subsidy in the form of the earned income tax credit, so we can in theory see what effect that has on bullshit jobs already.
Imagine you’re an employer and you’re trying to hire people. You know that for each person you hire, you’ll get an extra $15 an hour for their labor. This makes you really interested in hiring labor. If someone asks for $16 an hour, then even if normally you’d value their labor at only $1 an hour, the deal is still worth it for you, because you’d pay $16 an hour, get $1 an hour worth of labor, and $15 from the government, yielding the same deal as before
…
Why would the employer have to offer a wage higher than the subsidy? Prospective employees need food and shelter, and will accept any wage sufficient for that rather than starve. As an employer, there isn’t an infinite amount of work to be done, and there are coordination and principle/agent risks in hiring more people. The offered wage is going to be based on BATNAs on both sides, not correlated to any money coming in the back door.
Prospective employees need food and shelter, and will accept any wage sufficient for that rather than starve.
If this were true, then there would never be any wage higher than subsistence level. Let’s say it costs $2 an hour to feed someone and give them minimal shelter. Then all jobs would pay $2 an hour. But we don’t observe that, implying that employees will not “accept any wage [that keeps them from starving].”
The standard competition model tries to explain this by positing that employees have more than one option. Even if people don’t apply to multiple jobs, in theory they could; employers know that, and so they won’t generally offer employees starvation wages.
There are flaws with this theory; for instance, some workers are really bad at negotiation and get exploited. But generally we strive for simple theories that explain most of the facts before we move on to more complicated theories that can only explain a little more.
A few days ago, this comment was at something like +22. Now it’s at +9. It seems a few people strongly disagree with my recommendations. I’m curious if anyone would be willing to tell me why they disagree (though I’m most interested in disagreement with 1-4, as I admitted number 5 was “probably the weakest one on my list”).
I didn’t downvote, but I’m curious about #4. In my country I believe ‘wage subsidy’ refers to limited-time payments given to employers who hire people from certain categories (e.g. long-term unemployed). They’re framed as help with the initial costs of hiring, and are capped at a reasonably small amount. So it’s not obvious to me how they could be an uncontroversially good replacement for the minimum wage.
I don’t know how the term wage subsidy is used everywhere, but I’m referring to a simpler concept.
Let’s say the government passes a law that says, “If you get a job, then we will pay you (through taxes) $15 for each hour that you work, which will be added to your wages.” This would have a very similar effect to the minimum wage. Let’s say that you apply to a ton of jobs, and your best offer offers a wage-rate of $1 an hour. If you take that job, you’ll earn $1 + $15 = $16 an hour, including the wage subsidies. In effect, the wage subsidy puts a floor on the hourly wage you can get for your work.
In practice, a wage subsidy is often given to employers, not employees (probably because it’s easier to do so). However, theoretical supply and demand models imply that this has the same effect as giving the money directly to the worker. Here’s why.
Imagine you’re an employer and you’re trying to hire people. You know that for each person you hire, you’ll get an extra $15 an hour for their labor. This makes you really interested in hiring labor. If someone asks for $16 an hour, then even if normally you’d value their labor at only $1 an hour, the deal is still worth it for you, because you’d pay $16 an hour, get $1 an hour worth of labor, and $15 from the government, yielding the same deal as before.
The amount that workers end up benefiting relative to employers in this framework is called the economic incidence. Real world studies estimating the incidence of wage taxes and wage subsidies generally find that it falls heavily on the workers, which justifies us believing that a wage subsidy would be beneficial to workers.
But why would a wage subsidy be better than the minimum wage? By definition, the minimum wage is a price floor on labor. Consider other markets for a second: imagine we put a price floor on a pound of rice, say $50. This would mean that you can’t sell a pound of rice for less than $50. This would have the effect of making rice a lot more expensive, which would be good for many rice-producers (just as a minimum wage is good for many workers). However, it will also mean that a ton of people will just stop eating rice, because they’d rather eat more affordable foods. Thus, the quantity supplied for rice will fall, ultimately pushing many rice-producers out of the industry, and making many people to stop eating rice (even though they’d eat it if it were cheaper).
Similarly, a (sufficiently high) minimum wage reduces the quantity of labor supplied, raising unemployment (with exceptions, such as in the famous monopsony model). Wage subsidies don’t have this effect, and as a bonus, we can choose whatever tax we think is best to fund it (as opposed to minimum wages, whose costs necessarily fall on specific employers).
Even in cases where a minimum wage doesn’t raise unemployment, there don’t seem to be compelling reasons why a wage subsidy would be worse, though some obscure arguments for this position are sometimes made. Here’s a video comparing wage subsidies to the minimum wage.
Got it, thanks. I haven’t watched the video you linked, but the first thing that comes to mind is the bureaucratic task of determining what qualifies as a legitimate, subsidisable job. If the eligibility criteria are generous and/or enforcement is lax, there will presumably be a lot of bullshit jobs (in both the ‘not actually real’ and ‘real but pointless’ senses) created just to claim the subsidy. Whereas a relatively strict system might have pretty high administrative costs, and would probably reject some deserving applicants.
Yeah, I agree with this critique. It’s worth noting that the United States already implements a wage subsidy in the form of the earned income tax credit, so we can in theory see what effect that has on bullshit jobs already.
Imagine you’re an employer and you’re trying to hire people. You know that for each person you hire, you’ll get an extra $15 an hour for their labor. This makes you really interested in hiring labor. If someone asks for $16 an hour, then even if normally you’d value their labor at only $1 an hour, the deal is still worth it for you, because you’d pay $16 an hour, get $1 an hour worth of labor, and $15 from the government, yielding the same deal as before …
Why would the employer have to offer a wage higher than the subsidy? Prospective employees need food and shelter, and will accept any wage sufficient for that rather than starve. As an employer, there isn’t an infinite amount of work to be done, and there are coordination and principle/agent risks in hiring more people. The offered wage is going to be based on BATNAs on both sides, not correlated to any money coming in the back door.
Plus the Fraud, of course. So much Fraud.
If this were true, then there would never be any wage higher than subsistence level. Let’s say it costs $2 an hour to feed someone and give them minimal shelter. Then all jobs would pay $2 an hour. But we don’t observe that, implying that employees will not “accept any wage [that keeps them from starving].”
The standard competition model tries to explain this by positing that employees have more than one option. Even if people don’t apply to multiple jobs, in theory they could; employers know that, and so they won’t generally offer employees starvation wages.
There are flaws with this theory; for instance, some workers are really bad at negotiation and get exploited. But generally we strive for simple theories that explain most of the facts before we move on to more complicated theories that can only explain a little more.