Regardless of the size of wealth and substitution effects for workers, the benefit of a wage subsidy will accrue disproportionately to workers if the labor supply curve is relatively more wage-inelastic than the labor demand curve.

Question

Quizplus · Accepted Answer

If the labor supply curve is relatively more wage-inelastic than the labor demand curve, workers will not be able to easily substitute away from the labor market and will therefore benefit more from a wage subsidy. This means that even if the size of wealth and substitution effects for workers is not very significant, the wage subsidy will still have a greater impact on workers than on employers.

Regardless of the Size of Wealth and Substitution Effects for Workers