Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

What are the fiscal implications of minimum wage?

25.09.2007
What is shown is that the minimum wage acts as a constraint on the tax evasion decision and induces an increase in compliance by some agents, while pushing others out of the formal labour market into the black economy or into inactivity.

What are the fiscal implications of introducing or increasing the minimum wage? How can we explain the very high spike at the minimum wage level appearing in the wage distribution of some countries? What is the effect of in-work benefits in labour markets characterized by search frictions? Is their impact on labour market variables like unemployment and labour force participation stronger or weaker once we account for their financing? These are some of the issues addressed by Mirco Tonin in his dissertation at the Institute for International Economic Studies, Stockholm University.

The first set of questions is addressed by looking at the interaction between underreporting of earnings by employed labour and minimum wage legislation from a theoretical and empirical perspective. Tax evasion by employed labour in the form of underreporting of earnings to fiscal authorities is particularly common in Eastern Europe and the Former Soviet Union, but also in countries like Turkey, Argentina and Italy. What is shown is that the minimum wage acts as a constraint on the tax evasion decision and induces an increase in compliance by some agents, while pushing others out of the formal labour market into the black economy or into inactivity.

"The overall effect when enforcement is not too effective is to unambiguously increase fiscal revenues. The distribution of the fiscal burden is also altered, turning a nominally neutral fiscal regime into a regressive one. Moreover, an otherwise smooth distribution of declared earnings is transformed into a distribution presenting a spike at the minimum wage level," says Mirco Tonin.

Another prediction of the theory is that a minimum wage hike implies a fall in true income also for workers who appear to benefit from the hike, as they keep their job and experience an increase in official earnings. This prediction is tested by using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment. The empirical approach used is to compare food consumption before and after the minimum wage hike by households affected by it to food consumption by similar but unaffected households. The test supports the prediction of the model, showing that the minimum wage hike was indeed instrumental in increasing compliance with fiscal regulation.

The last chapter, co-authored with Ann-Sofie Kolm, looks at the impact of in-work benefits in labour markets characterized by search frictions. In-work benefits are increasingly popular among policy makers and they are usually introduced to "make work pay": by supplementing low wages, they provide employment incentives. The paper looks at the impact of benefits once their effect on wages and their financing are accounted for. What is shown is that introducing or increasing in-work benefits increases labour force participation, employment, and search intensity by unemployed, while wages and the unemployment rate decline. The impact of benefits on job creation is an important factor behind employment growth.

"The analysis of financing reveals that increasing in-work benefits financed through a proportional tax rate is equivalent to reducing the "effective" bargaining power of the worker. The conditions under which labour force participation, employment, and search intensity by the targeted group improves as a result are identified." says Mirco Tonin.

Title: "Essays on Labour Market Structure and Policies"

Further information
Mirco Tonin, The Institute for International Economic Studies, Stockholm University, tel. +36 20 4250025 and +44 78 24712760, e-mail Tonin@iies.su.se, M.Tonin@soton.ac.uk.

Pressofficer Maria Sandqvist; maria.sandqvist@eks.su.se; +46-70664 22 64

Maria Sandqvist | idw
Further information:
http://www.vr.se

More articles from Business and Finance:

nachricht Frugal Innovations: when less is more
19.04.2017 | Fraunhofer-Institut für Arbeitswirtschaft und Organisation IAO

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Wafer-thin Magnetic Materials Developed for Future Quantum Technologies

Two-dimensional magnetic structures are regarded as a promising material for new types of data storage, since the magnetic properties of individual molecular building blocks can be investigated and modified. For the first time, researchers have now produced a wafer-thin ferrimagnet, in which molecules with different magnetic centers arrange themselves on a gold surface to form a checkerboard pattern. Scientists at the Swiss Nanoscience Institute at the University of Basel and the Paul Scherrer Institute published their findings in the journal Nature Communications.

Ferrimagnets are composed of two centers which are magnetized at different strengths and point in opposing directions. Two-dimensional, quasi-flat ferrimagnets...

Im Focus: World's thinnest hologram paves path to new 3-D world

Nano-hologram paves way for integration of 3-D holography into everyday electronics

An Australian-Chinese research team has created the world's thinnest hologram, paving the way towards the integration of 3D holography into everyday...

Im Focus: Using graphene to create quantum bits

In the race to produce a quantum computer, a number of projects are seeking a way to create quantum bits -- or qubits -- that are stable, meaning they are not much affected by changes in their environment. This normally needs highly nonlinear non-dissipative elements capable of functioning at very low temperatures.

In pursuit of this goal, researchers at EPFL's Laboratory of Photonics and Quantum Measurements LPQM (STI/SB), have investigated a nonlinear graphene-based...

Im Focus: Bacteria harness the lotus effect to protect themselves

Biofilms: Researchers find the causes of water-repelling properties

Dental plaque and the viscous brown slime in drainpipes are two familiar examples of bacterial biofilms. Removing such bacterial depositions from surfaces is...

Im Focus: Hydrogen Bonds Directly Detected for the First Time

For the first time, scientists have succeeded in studying the strength of hydrogen bonds in a single molecule using an atomic force microscope. Researchers from the University of Basel’s Swiss Nanoscience Institute network have reported the results in the journal Science Advances.

Hydrogen is the most common element in the universe and is an integral part of almost all organic compounds. Molecules and sections of macromolecules are...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Dortmund MST Conference presents Individualized Healthcare Solutions with micro and nanotechnology

22.05.2017 | Event News

Innovation 4.0: Shaping a humane fourth industrial revolution

17.05.2017 | Event News

Media accreditation opens for historic year at European Health Forum Gastein

16.05.2017 | Event News

 
Latest News

New approach to revolutionize the production of molecular hydrogen

22.05.2017 | Materials Sciences

Scientists enlist engineered protein to battle the MERS virus

22.05.2017 | Life Sciences

Experts explain origins of topographic relief on Earth, Mars and Titan

22.05.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>