Work Incentives, Earnings-Related Subsidies, and Employment in Low-Wage Labor Markets - Empirical Analysis and Policy Simulations for Germany 

The goal of this project is to empirically analyze the work incentive and employment effects of earnings-related subsidies in the presence of high structural unemployment when labor market flexibility is hindered by wage rigidity related to institutional factors, in particular minimum wages and means-tested income support for unemployed people. We specify and estimate a structural microeconometric model that accounts for both demand-side rationing in low-wage labor markets and the disincentive effects to take up low-wage jobs induced by the tax-benefit system. The model accounts for both the extensive and intensive labor supply margin as well as joint labor supply decision of couples and non-convexities of household budget constraints due to the complexity of the German tax-benefit system. We apply the model to the evaluation of the labor market and welfare effects of earnings-related subsidies in the presence of minimum wages.