Wage subsidy
Its purposes are to redistribute income and to obviate the welfare trap attributed to other forms of relief, thereby reducing unemployment.
[5] The wage subsidy differs from universal basic income (UBI) in being limited in its scope to workers in paid employment, and does not generally seek to take the place of other benefits.
In a conventional system the tax payable on an income y may be shown by the solid red line in the diagram, where θ is the threshold.
Under a wage subsidy the employee's contribution to the state might be shown by the broken line below θ, being negative for workers on low income.
[5]: 217–8 A wage subsidy is well-suited for implementation through the income tax system, since its intended recipients are workers who are expected to be registered with the taxation authorities.
[6] If a society decides to pay a fixed stipend per capita, it has the choice of making the payment unconditional or conditional (usually meaning for it to be limited to people in work, varyingly understood), and of making a full income payment (i.e. enough to live on) or just a partial subsidy (which needs to be supplemented by income from another source).
The graph shows the take-home salary y' for a worker as a function of the wage an employer would be willing to pay them for their services; y' is y adjusted for all taxes, benefits, and subsidies and for any state-funded basic income.
Let u be the cost of living at what society considers to be the minimum reasonable standard and assume that both unemployment benefit and UBI would be set at this level.
Let θ be the income tax threshold in a conventional system and y0 be the marginal productivity of the least employable person in the workforce (excluding extreme cases).
A worker whose value to his or her employer lies between u and θ will take home exactly what they earn, receiving no benefits and paying no taxes.
Distortions exist when there are circumstances preventing the payment of wages lower than some fixed value, with the result that potential workers whose value to their employer would be less than this are left unemployed.
The subsidy would avoid the welfare trap, but might have less effect against a wage minimum imposed through collective bargaining, since trades unions might respond to the measure by increasing their demands.
The distribution of income produced by the free market has no claims to optimality, so it is generally accepted that social wellbeing is maximised by providing negative taxation at some level.
[5]: 211 If, under a standard tax-and-benefits system, a sum u is paid to everyone who is unable to obtain work, then those people whose marginal productivity (which determines their wage in a competitive market) is less than u will prefer to be unemployed.
A recent study concluded that "automation increases inequality in every scenario because it tends to displace the lowest-paid workers".
Hence a tax-and-benefit system may function as intended when first implemented, but the introduction of automation may lead to an increasing part of the workforce getting caught in the welfare trap.
The implementation of this negative tax has been welcomed both by economists on the left such as Thomas Piketty[11] and by liberals like Alain Madelin.
Atkinson takes an inclusive view of eligibility,[citation needed] whereas Phelps is exclusive, limiting the subsidy to the employees of "qualifying firms" and thereby excluding the self-employed.
[2]: 56 Any decision taken here runs the risk of arbitrariness, of enabling abuse or inducing perverse incentives, or of requiring an intrusive bureaucracy.
