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

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. University of Wisconsin Press andThe Board of Regents of the University of Wisconsin System are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Human Resources. ABSTRACTThree 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 wageand-income subsidy programs is opened for further research.Economic analysis of income maintenance has dealt largely with the problem of deterioration in work incentives of the poor when their incomes are subsidized. Several reasons account for the paramountcy of the incentives question in the treatment of this important public issue. Of course, there are the purely economic reasons for concern-the costs of the program to the government and to society depend upon the degree of work curtailment under a subsidy scheme. If a maintenance program is to achieve its primary objective of raising low incomes, it must not allow its beneficiaries to reduce their earnings too much. And if the internal tax rate of a maintenance The author is a graduate student in economics at Massachusetts Institute of Technology. * The author wishes to thank M.I.T. Professors Lester Thurow, Michael Piore, Edwin Kuh, and Duncan Foley for their comments and suggestions. The author alone is responsible for the views expressed here and for any errors. | THE JOURNAL OF HUMAN RESOURCESprogram must be kept low to avoid large disincentives to work, then the program will have to cover many of the nonpoor as well. Longer-run and less crystallized economic notions also enter into the feeling that a maintenance system should be designed so as not to discourage work on any substantial scale. It is widely held that the only long-run relief for the poor is their upgrading for absorption into the more highly productive parts of the economy. Beyond such economic reasoning looms a tacit realization that society is not eager to enact a program which allows the poor to receive p...

The Temporary Assistance for Needy Families Program

“…This should not be surprising since benefits are no longer paid to nonworkers under a wage or earnings subsidy, and, from a equity and distributional point of view, a progressive tax system is replaced by a regressive one. As this early literature recognized (Kesselman, 1969;Barth and Greenberg, 1971), and has been noted in this review, replacing an income support program with such a subsidy would require a categorization of the eligible population which has its own difficulties.…”

“…Graphically, this is identical to Figure 9 except that those initially off welfare, on segment DE, are also eligible. The relative merits of wage-rate and earnings subsidies, on the one hand, and a negative income or similar income support program with a G and t, on the other, were debated extensively in the late 1960s and early 1970s (e.g., Barth and Greenberg, 1971;Garfinkel, 1973;Kesselman, 1969Kesselman, , 1973Zeckhauser, 1971). That literature showed that there will almost certainly be positive effects on labor supply if an income support program is completely replaced by a wage or earnings subsidy.…”

“…Thus the offsetting effects of earnings subsidies on labor supply cannot be avoided. Burke (1996) Disregard is 100% as long as net income is below poverty line; disregard is 0 if net income is above poverty line but earnings are below poverty line; and benefits goes to zero if earnings are above poverty line Table 5 Selected Characteristics of AFDC and TANF Families, 1969196919791988 Pct 1942 1948 1953 1961 1967 1973 1979 1983 1988 1992 Year Other Incapacitated Widowed Divorced/separated Not Married Source: U.S. DHHS (1995, p.63). …”

Alternative Conceptions of Poverty and Their Implications for Income Maintenance

“…In the economic literature on income maintenance (Green, 1968;Kesselman, 1969), the analysis of work discentives and other effects from income manipulation proceeds as if, aside from universalistic considerations such as gender and physical condition of the family head, the poverty population can be treated as a homogeneous group. In this paper we have attempted to demonstrate the deficiency of that simplification.…”

Do wage subsidies for disabled workers reduce their non-employment? - evidence from the Danish Flexjob scheme

“…By bringing individuals out of unemployment or other benefit receipt schemes, wage subsidies are in theory a powerful tool for reducing the welfare loss of unemployment (Kaldor 1936, Kessleman 1969, Phelps 1994, Calmfors 1994, i.e., the utility loss from being out of work. By lowering unemployment, subsidies can lessen employer contributions to social insurance.…”