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.
When workers and firms cannot commit to
long-term contracts and capital investments are sunk, union power can reduce
Although coverage of collective bargaining
agreements has been declining for decades in most countries, it is still
extensive, especially in non-Anglo-Saxon countries. Strong unions may
influence firms' incentives to invest in capital, particularly in sectors
where capital investments are sunk (irreversible), as in research-intensive
sectors. Whether unions affect firms' investment in capital depends on the
structure and coordination of bargaining, the preference of unions between
wages and employment, the quality of labor-management relations, the
structure of corporate governance, and the existence of social pacts, among
Sectoral collective contracts reduce
inequality but may lead to job losses among workers with earnings close to
the wage floors
In many countries, the wage floors and
working conditions set in collective contracts negotiated by a subset of
employers and unions are subsequently extended to all employees in an
industry. Those extensions ensure common working conditions within the
industry, mitigate wage inequality, and reduce gender wage gaps. However,
little is known about the so-called bite of collective contracts and whether
they limit wage adjustments for all workers. Evidence suggests that
collective contract benefits come at the cost of reduced employment levels,
though typically only for workers earning close to the wage floors.
Do performance-related pay and financial
participation schemes have an effect on firms’ performance?
A growing number of firms offer compensation
packages that link pay to performance. The aim is to motivate workers to be
more efficient while also increasing their attachment to the company,
thereby reducing turnover and absenteeism. The effects of
performance-related pay on productivity depend on the scheme type and
design, with individual incentives showing the largest effect. Governments
often offer tax breaks and financial incentives to promote
performance-related pay, though their desirability has been questioned due
to large deadweight losses involved. The diffusion of remote work will
increase the relevance of performance-related pay.
Reducing under-reporting of salaries requires
In transition economies, a significant number of
companies reduce their tax and social contributions by paying their staff an
official salary, described in a registered formal employment agreement, and
an extra, undeclared “envelope wage,” via a verbal unwritten agreement. The
consequences include a loss of government income and a lack of fair play for
lawful companies. For employees, accepting under-reported wages reduces
their access to credit and their social protections. Addressing this issue
will help increase the quality of working conditions, strengthen trade
unions, and reduce unfair competition.
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.
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?
Are low-paid jobs stepping stones to higher-paid
jobs, do they become persistent, or do they lead to recurring
Low-wage employment has become an important
feature of the labor market and a controversial topic for debate in many
countries. How to interpret the prominence of low-paid jobs and whether they
are beneficial to workers or society is still an open question. The answer
depends on whether low-paid jobs are largely transitory and serve as
stepping stones to higher-paid employment, whether they become persistent,
or whether they result in repeated unemployment. The empirical evidence is
mixed, pointing to both stepping-stone effects and “scarring” effects (i.e.
long-lasting detrimental effects) of low-paid work.
Overtime penalties, payroll taxes, and other
labor policies alter costs and change employment and output
Higher labor costs (higher wage rates and
employee benefits) make workers better off, but they can reduce companies’
profits, the number of jobs, and the hours each person works. The minimum
wage, overtime pay, payroll taxes, and hiring subsidies are just a few of
the policies that affect labor costs. Policies that increase labor costs can
substantially affect both employment and hours, in individual companies as
well as in the overall economy.
Strictly controlling overtime hours and pay does
not boost employment—it could even lower it
Regulation of standard workweek hours and
overtime hours and pay can protect workers who might otherwise be required
to work more than they would like to at the going rate. By discouraging the
use of overtime, such regulation can increase the standard hourly wage of
some workers and encourage work sharing that increases employment, with
particular advantages for female workers. However, regulation of overtime
raises employment costs, setting in motion economic forces that can limit,
neutralize, or even reduce employment. And increasing the coverage of
overtime pay regulations has little effect on the share of workers who work
overtime or on weekly overtime hours per worker.