Imagine you’re an employer and you’re trying to hire people. You know that for each person you hire, you’ll get an extra $15 an hour for their labor. This makes you really interested in hiring labor. If someone asks for $16 an hour, then even if normally you’d value their labor at only $1 an hour, the deal is still worth it for you, because you’d pay $16 an hour, get $1 an hour worth of labor, and $15 from the government, yielding the same deal as before
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Why would the employer have to offer a wage higher than the subsidy? Prospective employees need food and shelter, and will accept any wage sufficient for that rather than starve. As an employer, there isn’t an infinite amount of work to be done, and there are coordination and principle/agent risks in hiring more people. The offered wage is going to be based on BATNAs on both sides, not correlated to any money coming in the back door.
Prospective employees need food and shelter, and will accept any wage sufficient for that rather than starve.
If this were true, then there would never be any wage higher than subsistence level. Let’s say it costs $2 an hour to feed someone and give them minimal shelter. Then all jobs would pay $2 an hour. But we don’t observe that, implying that employees will not “accept any wage [that keeps them from starving].”
The standard competition model tries to explain this by positing that employees have more than one option. Even if people don’t apply to multiple jobs, in theory they could; employers know that, and so they won’t generally offer employees starvation wages.
There are flaws with this theory; for instance, some workers are really bad at negotiation and get exploited. But generally we strive for simple theories that explain most of the facts before we move on to more complicated theories that can only explain a little more.
Imagine you’re an employer and you’re trying to hire people. You know that for each person you hire, you’ll get an extra $15 an hour for their labor. This makes you really interested in hiring labor. If someone asks for $16 an hour, then even if normally you’d value their labor at only $1 an hour, the deal is still worth it for you, because you’d pay $16 an hour, get $1 an hour worth of labor, and $15 from the government, yielding the same deal as before …
Why would the employer have to offer a wage higher than the subsidy? Prospective employees need food and shelter, and will accept any wage sufficient for that rather than starve. As an employer, there isn’t an infinite amount of work to be done, and there are coordination and principle/agent risks in hiring more people. The offered wage is going to be based on BATNAs on both sides, not correlated to any money coming in the back door.
Plus the Fraud, of course. So much Fraud.
If this were true, then there would never be any wage higher than subsistence level. Let’s say it costs $2 an hour to feed someone and give them minimal shelter. Then all jobs would pay $2 an hour. But we don’t observe that, implying that employees will not “accept any wage [that keeps them from starving].”
The standard competition model tries to explain this by positing that employees have more than one option. Even if people don’t apply to multiple jobs, in theory they could; employers know that, and so they won’t generally offer employees starvation wages.
There are flaws with this theory; for instance, some workers are really bad at negotiation and get exploited. But generally we strive for simple theories that explain most of the facts before we move on to more complicated theories that can only explain a little more.