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The B.E. Journal of Economic Analysis & Policy

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The Optimal Policy Combination of the Minimum Wage and the Earned Income Tax Credit

Miki Malul
  • 1Ben Gurion University,
/ Israel Luski
  • 2Ben Gurion University,
Published Online: 2009-11-20 | DOI: https://doi.org/10.2202/1935-1682.1953


This paper evaluates the consequences of minimum wage (MW) and earned income tax credit (EITC) in a model with heterogeneous costs of investment in human capital. Our model studies the effects of a MW and an EITC on employment, productivity, and total output for two types of groups: those with a low cost of acquiring human capital and a long horizon of earnings (Type Ys); and those with a high cost of acquiring human capital and a short horizon of earnings (Type Os). We assume that Type Ys consider investing in human capital while Type Os have a certain predetermined level of human capital and do not consider changing it. Our model suggests that a government might consider imposing a MW exclusively for Type Y individuals and an EITC exclusively for Type O individuals. Some of the best effects of each policy would therefore be obtained and some of the worst consequences would be avoided.

Keywords: minimum wage (MW); earned income tax credit (EITC); human capital

About the article

Published Online: 2009-11-20

Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, DOI: https://doi.org/10.2202/1935-1682.1953. Export Citation

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