Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171061
Authors: 
Blumkin, Tomer
Pinhas, Haim
Zultan, Ro'i
Year of Publication: 
2017
Series/Report no.: 
CESifo Working Paper 6597
Abstract: 
Wage subsidies can be provided directly to the worker, as in the federal Earned Income Tax Credit (EITC) program. They can also be provided indirectly by subsidizing the employer; by reducing the cost of labor, employers are induced to offer higher wages. The standard literature stipulates that the identity of the entity that is statutorily entitled for the subsidy bears no implications for the economic incidence. We propose and test a mechanism by which indirect subsidies can lead to higher social welfare. A substantial empirical literature establishes that workers reciprocate gifts in the form of higher wages with the gift of exerting higher effort. Thus, if a wage subsidy is implemented by indirectly subsidizing employers, employers face a lower cost of labor and increase their wages, leading workers to reciprocate with higher effort and productivity than achieved by providing the equivalent direct subsidy. A controlled laboratory experiment supports our behavioral hypotheses and confirms the behavioral and welfare implications
Subjects: 
wage subsidies
welfare
gift exchange
tax incidence
JEL: 
C92
H21
H22
H53
J33
Document Type: 
Working Paper

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