At Whose Service? Subsidizing Services and the Skill Premium
CentER Discussion Paper Series No. 2010-01
19 Pages Posted: 11 Jan 2010
Date Written: November 6, 2009
Abstract
In this paper we investigate the effects of subsidizing low-skilled, labourintensive services hired by high-skilled individuals in the presence of labour income taxation. Whether such a subsidy can be Paretoimproving depends crucially on the degree of substitutability of both types of labour in the non-service sector. In case of some substitutability, a service subsidy can benefit all and decrease inequality, but in case of complementarity, low-skilled individuals benefit and high-skilled individuals are worse off.
Keywords: household production, services, skill premium, subsidy, wage tax
JEL Classification: D13, H24, H53, J13, J22, J24, O17
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