Income Security Policy paper No. 21
Employee-Based Versus Employer-Based Subsidies to Low-Wage Workers: A Public Finance Perspective
Stacy Dickert-Conlin and Douglas Holtz-Eakin
April 1999
Abstract: We revisit the
relative merits of employee-based versus
employer-based labor market subsidies. While
conventional analyses stress the equivalence
of these approaches, we find a modest
preference for employee-based approaches.
Because the population of low-wage workers
overlaps, but is not identical to, the
populations of low-skill or low-income
workers, simple employer-based approaches are
likely to be poorly targeted. Targeting may be
improved by identification of eligible
workers, but identification itself raises the
possibility of detrimental stigma associated
with the program. When combined with lower
participation rates among firms than among
households, the size of employer-based
subsidies needed to match the outcome of an
employee-based subsidy becomes quite large. We
review the empirical performance of major
subsidy programs. We find that employer-based
programs have been characterized by low
participation rates and relatively little
success. In contrast, the Earned Income Tax
Credit appears relatively successful in
targeting the desired population, inducing
additional labor market participation, and
raising incomes.
A revised version of this paper
appears in Finding Jobs: Work and Welfare
Reform (R. Blank and D. Card, eds.),
New York: Russell Sage Foundation, 2000, pp.
262-295.
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