Wage Subsidies vs. Minimum Wage

… a core concept in Economic Analysis and Atlas102

Concept description

A wage subsidy has the opposite effect on the demand for labour than has the minimum wage.

In his MRU video (reference below, link on right) Alex Tabarrok compares the effects.

• A wage subsidy costs the government money but increases employment, from Qm to Qs on the chart below (and can reduce other government expenditures such as welfare payments)
• A minimum wage regulation does not cost the government money but reduces employment, from Qm to Qp on the second chart below (and can affect other government expenditures)

Practice questions (from MRU Chapter 4)

From http://www.mruniversity.com/node/186787, accessed 29 April 2016.

1. What effect do wage subsidies have on employment?
   1. Wage subsidies increase employment
   2. Wage subsidies decrease employment
   3. Wage subsidies have no effect on employment
2. What effect do wage subsidies have on the demand for welfare payments? 
   1. Wage subsidies increase the demand for welfare payments
   2. Wage subsidies decrease the demand for welfare payments 
   3. Wage subsidies have no effect on the demand for welfare payments
3. Which one of the following options is a real life example of a wage subsidy?
   1. Food stamps (SNAP)
   2. Housing assistance 
   3. The Earned Income Tax Credit 
   4. The minimum wage
4. Fill in the blanks: Wage subsidies ____ the demand for labor and the number of low skilled jobs. The minimum wage laws ____ the demand for labor and the number of low skilled jobs.
   1. increase; increase
   2. increase; decrease 
   3. decrease; increase 
   4. decrease; decrease

Source

Alex Tabarrok, Wage Subsidies, Marginal Revolution University, 4-minute video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/wage-subsidies-minimum-wage-earned-income-tax-credit, accessed 29 April 2016.

Atlas topic and subject

Taxes and Subsidies (core topic) in Economic Analysis.

Page created by: Ian Clark, last modified on 29 April 2016.

Image: Minute 0.15 of MRU Video, at http://www.mruniversity.com/courses/principles-economics-microeconomics/wage-subsidies-minimum-wage-earned-income-tax-credit, accessed 29 April 2016.