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- [Alex] In our final lecture on taxes and subsidies,
we're going to take a look at wage subsidies
and compare them to the minimum wage.
Suppose that we are especially interested in increasing the number
of jobs for low-skilled workers.
That is, we think that the value of these jobs exceeds the wage,
the value, to consumers.
Perhaps because we believe that there's a special duty
to reduce poverty, or that an increase in number
of low-skilled jobs would reduce welfare payments,
or perhaps reduce crime or inequality
or increase social cohesion.
There may be a variety of reasons.
If that's what we're interested in, then Edmund Phelps argues
that one of the best means of doing this
is through a wage subsidy.
So let's take a look.
Well imagine that the market wage starts out here at $10.50,
and here's the quantity of labor exchanged
at that market wage.
Our wage subsidy is given by this wage wedge.
Let's call this a $4 wage wedge.
As usual, we drive it into the diagram
and that will give us the wage received by workers
as well as the wage paid by firms.
So notice what the wage subsidy does.
It reduces the wage to firms so the firms want
to hire more workers, and at the same time,
it increases the wage to workers.
And the division is, as usual, is going to be determined
by the relative elasticities of demand and supply.
For the same reasons that a wage tax probably falls
mostly on workers, a wage subsidy will fall mostly
on workers, as well, though I've drawn it
more evenly here.
Now what's the cost of a wage subsidy?
Well the wage subsidy could have a big cost
to tax payers, namely the per job cost,
the $4 cost, or this could be per hour cost,
times the total number of hours.
So the cost of the subsidies given
by this entire blue area right here.
Now, Edmund Phelps argues that the cost would actually
be less than this because of savings on crime
and welfare payments and other things like that.
So it may be worth doing.
It's also worthwhile to compare a wage subsidy
with a minimum wage.
Now we haven't actually talked about the minimum wage yet
and we're going to do so in a future chapter.
So consider this bonus material.
This maybe material you may want to come back to
at a later time.
But let's imagine that we have a minimum wage
at the same level as would be created
by the wage subsidy.
In this case a minimum wage of let's say, $12.
Key point -- there are two key points
about the minimum wage.
First, it doesn't cost the government anything,
which is one reason why taxpayers may like it
better than the wage subsidy.
It does cost employers.
And what we can see is that at this minimum wage,
the demand for labor would be much less.
The demand for labor would only be Qd.
So a big difference between a wage subsidy
and a minimum wage is that the wage subsidy increases
the demand for labor.
It increases the number of low-skilled jobs.
While a minimum wage decreases the demand
for labor and decreases the number of low-skilled jobs.
That's one reason why economists tend to be more in favor
of wage subsidies than they do of minimum wages.
We actually have an extensive wage subsidy program
in the United States that's very large.
It's not talked about as much as the minimum wage.
It's called the Earned Income Tax Credit.
And a lot of economists, such as Edmund Phelps,
Nobel Prize winner, argue that a better way
of helping low-skilled workers is to expand
the Earned Income Tax Credit, make it available to more workers,
and this in fact would be superior to a minimum wage.
Okay, we'll be talking more about these issues later on.
That's enough for today. Thanks.
- [Narrator] If you want to test yourself
click "Practice Questions."
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