The optimal policy combination of the minimum wage and the earned income tax credit

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17 Scopus citations

Abstract

This paper evaluates the consequences of minimum wage (MW) and earned income tax credit (EITC) in a model with heterogeneous costs of investment in human capital. Our model studies the effects of a MW and an EITC on employment, productivity, and total output for two types of groups: those with a low cost of acquiring human capital and a long horizon of earnings (Type Ys); and those with a high cost of acquiring human capital and a short horizon of earnings (Type Os). We assume that Type Ys consider investing in human capital while Type Os have a certain predetermined level of human capital and do not consider changing it. Our model suggests that a government might consider imposing a MW exclusively for Type Y individuals and an EITC exclusively for Type O individuals. Some of the best effects of each policy would therefore be obtained and some of the worst consequences would be avoided.

Original languageEnglish
Article number51
JournalB.E. Journal of Economic Analysis and Policy
Volume9
Issue number1
DOIs
StatePublished - 1 Jan 2009

Keywords

  • Earned income tax credit (EITC)
  • Human capital
  • Minimum wage (MW)

ASJC Scopus subject areas

  • Economics and Econometrics
  • Economics, Econometrics and Finance (miscellaneous)

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