Marginal Wage Research Articles

Estimating workers’ marginal valuation of employer health benefits: Would insured workers prefer more health insurance or higher wages?

In recent years the cost of health insurance has been increasing much faster than wages. In the face of these rising costs, many employers will have to make difficult decisions about whether to cut back health benefits or to compensate workers with lower wages or lower wage growth. In this paper, we ask the question, “Which do workers value more—one additional dollar's worth of health benefits or one more dollar in their pockets? ” Using a new approach to obtaining estimates of insured workers’ marginal valuation of health benefits this paper estimates how much, on average, employees value the marginal dollar paid by employers for their workers’ health insurance. We find that insured workers value the marginal health premium dollar at significantly less than the marginal wage dollar. However, workers value insurance generosity very highly. The marginal dollar spent on health insurance that adds an additional dollar's worth of observable dimensions of plan generosity, such as lower deductibles or coverage of additional services, is valued at significantly more than one dollar.

Wages and Wage Determination in 2006

In 2006 money wages grew more slowly than in 2005 and within Reserve Bank limits with no evidence of generalized wage pressures arising from skill shortages. The Reserve Bank raised interest rates three times during the year, further reducing housing affordability. Mortgagee sales of homes have exhibited a significant increase. There was intense media attention as to the impact on wages and conditions of the implementation of the Work Choices legislation. The long-awaited first decision by the Fair Pay Commission yielded an increase of AUS$27.36 per week for about 1m workers payable from 1 December. The lowest weekly wage rose to AUS$511.86, which represents a marginal real wage cut.

How Did the Elimination of the Earnings Test Above the Normal Retirement Age Affect Retirement Expectations?

The authors look at the effect of the 2000 repeal of the earnings test above the normal retirement age on retirement expectations of workers in the Health and Retirement Study, aged 51 to 61 in 1992. For men, they find that those whose marginal wage rate increased when the earnings test was repealed, had the largest increase in the probability to work full-time past normal retirement age. They do not find significant evidence of effects of the repeal of the earnings test on the probability to work past age 62 or the expected claiming age. On the other hand, for those reaching the normal retirement age, deviations between the age at which Social Security benefits are actually claimed and the previously reported expected age are more negative in 2000 than in 1998. Since their calculations show that the tax introduced by the earnings test was small when accounting for actuarial benefit adjustments and differential mortality, their results suggest that although male workers form expectations in a way consistent with forward-looking behavior, they misperceive the complicated rules of the earnings test. Results for females suggest similar patterns but estimates are imprecise.

Marginal Wage Subsidies: A Redistributive Instrument for Employment Creation

Critics of marginal wage subsidies claim that their inter-firm displacement effects eliminate their employment and fiscal advantages over general wage subsidies. We develop a model in which we show that the contrary is correct. Inter-firm displacement with marginal subsidies forces down prices and raises output and employment more than under general subsidies. Moreover, we show that marginal subsidization is less expensive for the public budget than general subsidies and that it serves as ar edistribution device by raising the labor share in the functional income distribution. A numerical illustration is used to support the theoretical results and to estimate their effects on unemployment in Germany.

Counterfactual decomposition of changes in wage distributions using quantile regression

We propose a method to decompose the changes in the wage distribution over a period of time in several factors contributing to those changes. The method is based on the estimation of marginal wage distributions consistent with a conditional distribution estimated by quantile regression as well as with any hypothesized distribution for the covariates. Comparing the marginal distributions implied by different distributions for the covariates, one is then able to perform counterfactual exercises. The proposed methodology enables the identification of the sources of the increased wage inequality observed in most countries. Specifically, it decomposes the changes in the wage distribution over a period of time into several factors contributing to those changes, namely by discriminating between changes in the characteristics of the working population and changes in the returns to these characteristics. We apply this methodology to Portuguese data for the period 1986–1995, and find that the observed increase in educational levels contributed decisively towards greater wage inequality. Copyright © 2005 John Wiley & Sons, Ltd.

Recreation Demand Choices and Revealed Values of Leisure Time

An approach to jointly estimating an endogenous marginal value of time function and a recreation budget share equation is developed. The specification requirements for the marginal value of time function, to ensure consistency with the maintained hypothesis of two binding constraints on choice, are articulated. The estimating model consistent with these requirements that nests several conventional treatments of the marginal value of time is highly significant. The general endogenous marginal value of time model outperforms other approaches and shows a more complex relationship between the marginal value of time and the individual's wage than has been used in previous work. (JEL J22, Q26)

Tax policy in a matching model with training

This paper develops a model of search on the labour market with training. We explore how the combination of an average job tax and a marginal wage tax can be used to alleviate inefficiencies in job matching and, at the same time, raise a positive revenue with minimal distortions in search and training. We find that (i) a wage tax is less distortionary to raise revenue than is a job tax if training is not distorted initially; (ii) this conclusion may reverse in the presence of training distortions; (iii) marginal wage taxes are less distortionary in economies where bargaining parties can commit to the wage profile.

Compensatory Justice and Basic Income

What is the most plausible and feasible conception of compensatory justice (CJ)? What conditions are required to achieve it? The general assertion of this chapter is that the more favorable the conditions under which people can freely choose their labor market careers, the more scope there is for CJ. More specifically, an economy with an unconditional basic income (BI) – one sufficient to cover the basic needs according to the prevailing standard of living – fulfills the conditions required from the (economist’s) viewpoint of CJ, and is better than a conditional system of social security with a guaranteed social minimum at the same or even somewhat higher level. This topic is of interest for welfare state reform proposals in both Europe (characterized by high unemployment, modest income inequality and generous social benefits) and the US (low unemployment, high and increasing income inequality along with the rise of the working poor). If CJ is considered as an important ideal, then the present move from lax welfare to workfare (see Figure 1 in the Introduction) in both Europe and the US is not the right way. In the same vein, to top up the income of the working poor by means of an EITC as is the case in the US, or to give employers marginal wage subsidies to raise the demand for low wage workers, does not improve the bargaining position of workers towards employers, and hence does not help to achieve CJ.

Is Leisure Time Worth More Than Working Time?

Abstract No abstract available.

Skill formation and job matching effects in wage growth in Ethiopia

This paper analyses production and labour market data on manufacturing firms in Ethiopia in order to test for skill formation and job-matching effects in wage growth. Estimated age and job seniority profiles of relative marginal productivity and relative wages indicate that both on-the-job skill formation and job matching are significant sources of the growth of productivity and wages with time in the labour market. However, there is also evidence that job matching is by far the more important of the two sources.

Wages and Teachers’ Hours of Work

This paper seeks to estimate the effect of teachers’ net marginal wages on their working hours, on the basis of a survey of Dutch teachers. The resulting uncompensated wage elasticity is significantly positive and has an average value of 0.2 for males and 0.4 for females. However, a general wage increase is a rather costly solution to teacher shortages. Alternatively, working full-time can be made attractive for part-time teachers by providing a premium for full-time teachers. This kind of premium provides part-time teachers with a stronger incentive to work full-time, as the negative income effect does not occur. Simulation results show that such a premium produces an effect that is almost seven times as large as a general wage increase.

Effects of the United States tax system on transitions into self-employment

This paper examines the impact of US income and payroll taxes on the decision of wage-and-salary employees to become self-employed. I exploit variations in the tax treatment of wage and self-employment income using the Panel Study of Income Dynamics. Results show that differential taxation has significant effects on the probability of making a transition into self-employment. Reducing an individual's marginal tax rate on self-employment income while holding his marginal wage tax rate constant reduces the probability of entry. Conversely, reducing his relative average tax rate in self-employment increases this probability by a smaller amount.

Marginal cost and price over the business cycle: comparative evidence from Japan and the United States

We estimate marginal cost over the cycle for Japan and the US, concentrating on the intensive margin of the firm's activity. Estimation is undertaken for 16 two-digit industries over a 30-year period to the early 1990s. Cost movements consist of changes in the nominal wage, movements along the marginal wage schedule, and changes in total hours per unit of output. Marginal cost implications of variations in the proportions of overtime/total hours and in marginal overtime premiums are accommodated. We also provide estimates of the cyclical behaviour of price-cost mark-ups. Marginal cost is found to be counter-cyclical in both countries due principally to the influence of pro-cyclical labour productivity. A pro-cyclical mark-up is found for both countries, although stronger in the US.

Tax Policy in a Model of Search with Training

This paper develops a model of search on the labour market with training. The model reveals how the tax system can restore the social optimum if the Hosios condition is not satisfied in the private equilibrium. Furthermore, the effects are explored of a second-best reform from average to marginal taxes when a given amount of public revenue has to be raised. We find that (i) a marginal wage tax is less distortionary to raise revenue than is an average tax per job, provided that training is not distorted initially; (ii) this conclusion may reverse in the presence of training distortions; (iii) marginal wage taxes are less distortionary in economies characterized by commitment in wage bargaining, such as the European labour market. Hence, tax reforms that reduce the average tax per job and raise the marginal wage tax, such as an EITC or a negative income tax, are more attractive in Europe than in the US.

Workers' Applications to Social Insurance Programs When Earnings and Eligibility Are Uncertain

A worker's decision whether to apply for public transfers may depend not only on his expected level of forgone labor earnings but also on his degree of uncertainty about such earnings. This article provides theory and evidence about the effects of earnings and eligibility uncertainty on participation decisions. The application rate to the Social Security Disability Insurance program is estimated to be about 15% higher than it would be in the absence of earnings risk. As an application to tax policy, optimal marginal wage tax rates may be higher than indicated in previous analyses involving wage uncertainty.

Marginal Tax Rate Uncertainty and Wage Indexation

Frequent changes in American tax laws over the last 30 years have led to uncertainty regarding the marginal tax rate on labour income. Using a multisector framework, this paper considers the implications of the tax rate uncertainty for wage flexibility. The Fiscal Authority sets the marginal wage tax rate, and is assumed to be the leader in a Stackelberg game. Wage setters in this game determine the degree of optimal indexation and are assumed to be followers. Increases in tax rate uncertainty lead to greater nominal wage flexibility, and a decrease in optimal progressivity. Additionally, indexation to nominal shocks is complete even if the product market is monopolistically competitive.

Oligopoly and overtime

Overtime pay is an important labor cost in many industries. However, the theoretical analysis of overtime pay has hitherto been carried out in a single firm framework. In this paper we present a simple oligopoly model to investigate the role of overtime pay on firm behavior. When firm interactions are taken into account, an increase in the marginal wage due to overtime provisions may limit competition and reduce industry output. This, in turn, affects not only industry employment but, depending on the exact nature of demand and production technology, may raise firm profits. Firms, however, may be unable to coordinate on mutually advantageous overtime pay without government or union intervention. Industry-wide unions may introduce and enforce overtime, and also use the wage schedule to seize the rents generated by overtime pay. We consider the overtime laws of Australia and the US and show how they can act to moderate competition. In contrast to standard single firm analysis, we show that overtime laws will generally affect firm output and employment behavior and may raise profits even when the straight-time wage is flexible.

The Effect of Food Subsidies on Labor Supply in Sri Lanka

Cash transfers or consumer subsidies can have substantial impacts on labor supply and, thus, on the level of net benefits of welfare programs. Under the standard theory of household utility maximization over leisure as well as goods, a change in exogenous income or in the price of commodities will affect labor allocation as well as commodity choice. Ravi Kanbur, Michael Keen, and Matti Tuomala show that the implications of transfers for labor supply are particularly important from a nonwelfarist perspective, in which increasingly the consumption of certain goods-often food-rather than total household utility is the objective of the program.' In contrast, from a welfarist perspective the consumption of leisure is valued at the marginal wage rate and treated as other commodities, and thus, utility is increased regardless of the consumption of commodities. Welfarist and nonwelfarist perspectives diverge with regard to not only marginal taxation (and subsidies) but targeting criteria as well. For example, Kanbur, Keen, and Tuomala show that under nonwelfarist criteria the effectiveness of an income transfer targeted on the basis of indicators correlated with poverty depends on labor-supply behavior; everything else being equal, groups with more elastic labor supply mitigate the effectiveness of a transfer in reducing poverty. Thus, Robert Moffitt states the following in a recent review: The lack of research on the effects of in-kind transfer programs on labor supply is a serious problem in light of the critical role such transfers have played [in the United States].2 This is concluded with full knowledge that there have been some relevant studies examining the labor-supply effects of programs in the United States, such as the

Monopsonistic wage discrimination, incentives and efficiency

Abstract A monopsonist maximizes profit with respect to two parameters of a payments schedule for each worker, a fixed income and an effort-related marginal wage rate. This leads to an equilibrium where wage rates are equal to workers' marginal productivities. The analysis is then extended to cases where workers' utilities also depend on the incomes of others and to the analysis of distortionary income taxation. The theory is also extended to apply to a public sector monopsony which is run either by workers who are engaged in rent-seeking or by a government that attempts to maximize the social surplus.

Nonlinear taxes in a life-cycle consistent model of family labour supply

This paper deals with family labour supply under nonlinear income taxation in a life-cycle consistent framework. A major purpose of the paper is, therefore, to bring together previous research on how to model joint supply decisions, life-cycle consistency and piecewise linear taxation, and then perform an econometric application using Swedish cross-section data. The paper starts by constructing an intertemporal model of household behaviour, which is used to derive optimal hours of work for the husband and the wife, respectively. Then, given the appropriate theoretical framework, the model is specified in a way suitable for econometric analysis. Regarding the estimation results, we find that both male and female labour supply are sensitive not only to changes in the own marginal wage rate and the virtual nonlabour income, but also to changes in the marginal wage rate of the spouse. The latter means that cross-wage effects are important when it comes to interpret the consequences of income taxation.