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

Recurring Project

Department

Public Economics
Gender Economics

Project Management

Stefan Bach

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.

DIW Team