Government Welfare Policy Under a Skilled-Biased Technological Change

Michel Strawczynski*, Oren Tirosh

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

In a world where machines replace unskilled work, an active labor market policy—represented by the combination of an optimal Earned Income Tax Credit (EITC) and income maintenance for the unemployed—provides incentives to increase participation in the labor market and depresses wages for unskilled employees. In this paper, this policy is tested against the alternative of allowing unskilled workers to receive a means-tested basic income (MTBI), as recently adopted by Spain. For a liberal social planner (i.e., includes consumption and leisure in individual utility), the MTBI dominates the active labor market policy. For a conservative social planner (i.e., evaluates social welfare based on individual utility from consumption), the active labor market policy dominates the MTBI. The potential dynamic effects of active labor policy on labor supply were considered in a simulation using updated empirical estimates; it shows that this policy becomes preferable for both types of the social planner.

Original languageAmerican English
Pages (from-to)515-557
Number of pages43
JournalPublic Finance Review
Volume50
Issue number5
DOIs
StatePublished - Sep 2022

Bibliographical note

Publisher Copyright:
© The Author(s) 2022.

Keywords

  • EITC
  • H24
  • H31
  • H53
  • machines
  • means-tested basic income
  • skilled-biased technological change
  • workers

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