Countries set minimum wages in different ways, and some countries set different wages for different groups of workers
The minimum wage has never been as high on the political agenda as it is today, with politicians in Germany, the UK, the US, and other OECD countries implementing substantial increases in the rate. One reason for the rising interest is the growing consensus among economists and policymakers that minimum wages, set at the right level, may help low paid workers without harming employment prospects. But how should countries set their minimum wage rate? The processes that countries use to set their minimum wage rate and structure differ greatly, as do the methods for adjusting it. The different approaches have merits and shortcomings.
The earned income tax credit boosts income and work effort among low-income parents, especially single mothers, and has contributed to the steep rise in employment among single mothers in the 1990s.
The earned income tax credit provides important benefits to low-income families with children. At substantial costs (over $70 billion to the US federal government), it increases the incomes of such families while encouraging parents to work more by subsidizing their incomes. But low-income adults without children and non-custodial parents receive very low payments under the program in most years. Many of these adults are less-educated men, whose labor force participation rates and relative wages have been declining for years. They might benefit significantly from a more generous earned income tax credit for childless adults.
Time-limited benefits may yield significant
welfare gains and help underemployed part-time workers move to full-time
A considerable share of the labor force consists
of underemployed part-time workers: employed workers who, for various
reasons, are unable to work as much as they would like to. Offering
unemployment benefits to part-time unemployed workers is controversial. On
the one hand, such benefits can strengthen incentives to take a part-time
job rather than remain fully unemployed, thus raising the probability of
obtaining at least some employment. On the other hand, these benefits weaken
incentives for part-time workers to look for full-time employment. It is
also difficult to distinguish people who work part-time by choice from those
who do so involuntarily.
GDP summarizes only one aspect of a country’s
condition; other measures in addition to GDP would be valuable
Gross domestic product (GDP) is the key
indicator of the health of an economy and can be easily compared across
countries. But it has limitations. GDP tells what is going on today, but
does not inform about sustainability of growth. The majority of time is
spent in home production, yet the value of this time is not included in GDP.
GDP does not measure happiness, so residents can be dissatisfied even when
GDP is rising. In addition, GDP does not consider environmental factors,
reflect what individuals do outside paid employment, or even measure the
current or future potential human capital of a country. Hence, complementary
measures may help to show a more comprehensive picture of an economy.
Enhancing the earned income tax credit would do
more to reduce poverty, at less cost, than increasing the minimum wage
Minimum wage increases are not an effective
mechanism for reducing poverty. And there is little causal evidence that
they do so. Most workers who gain from minimum wage increases do not live in
poor (or near-poor) families, while some who do live in poor families lose
their job as a result of such increases. The earned income tax credit is an
effective way to reduce poverty. It raises only the after-tax wage rates of
workers in low- and moderate-income families, the tax credit increases with
the number of dependent children, and evidence shows that it increases labor
force participation and employment in these families.
The type, quality, and quantity of
entrepreneurship are influenced significantly by corporate income
taxes—though only slightly
Corporate income taxation influences the
quantity and type of entrepreneurship, which in turn affects economic
development. Empirical evidence shows that higher corporate income tax rates
reduce business density and entrepreneurship entry rates and increase the
capital size of new firms. The progressivity of tax rates increases
entrepreneurship entry rates, whereas highly complex tax codes reduce them.
Policymakers should understand the effects and underlying mechanisms that
determine how corporate income taxation influences entrepreneurship in order
to provide a favorable business environment.
To boost the employment rate of the low-skilled
trapped in inactivity is it sufficient to supplement their earnings?
High risk of poverty and low employment rates
are widespread among low-skilled groups, especially in the case of some
household compositions (e.g. single mothers). “Making-work-pay” policies
have been advocated for and implemented to address these issues. They
alleviate the above-mentioned problems without providing a disincentive to
work. However, do they deliver on their promises? If they do reduce poverty
and enhance employment, is it possible to determine their effects on
indicators of well-being, such as mental health and life satisfaction, or on
the acquisition of human capital?
Promoting intergenerational mobility makes
societies more egalitarian
Income inequality has been on the rise in many
countries. Is this bad? One way to decide is to look at the degree of change
in incomes across generations (intergenerational mobility) and, more
generally, at the extent to which income differences among individuals are
traceable to their social origins. Inequalities that reflect factors largely
out of an individual’s control—such as parents’ education, local schools,
and communities—require attention in order to reduce income inequality.
Evidence shows a negative association between income inequality and
intergenerational mobility, and a positive relationship between mobility and
Market adjustments to tax evasion alter factor
and product prices, which determine the true impacts and beneficiaries of
How does tax evasion affect the distribution of
income? In the standard analysis of tax evasion, all the benefits are
assumed to accrue to tax evaders. However, tax evasion has other impacts
that determine its true effects. As factors of production move from
tax-compliant to tax-evading (informal) sectors, these market adjustments
generate changes in relative prices of products and factors, thereby
affecting what consumers pay and what workers earn. As a result, at least
some of the gains from evasion are shifted to consumers of goods produced by
tax evaders, and at least some of the returns to tax evaders are competed
away via lower wages.
Keeping older workers in the workforce longer
not only doesn’t harm the employment of younger workers, but might actually
The fiscal sustainability of state pensions is
a central concern of policymakers in nearly every advanced economy.
Policymakers have attempted to ensure the sustainability of these programs
in recent decades by raising retirement ages. However, there are concerns
that keeping older workers in the workforce for longer might have negative
consequences for younger workers. Since youth unemployment is a pressing
problem throughout advanced and developing countries, it is important to
consider the impact of these policies on the employment prospects of the