AdSJ - 3ºH

TOPIC 1: INTRODUCTION:

THE ROLE OF PUBLIC INTERVENTION IN THE ECONOMY:

WHY DOES GOVERNMENT INTERVENE IN THE ECONOMY?:
1. Market failure:
- imperfect competition: monopolies,…
- Public goods (non-excludable and non-rival): defense,…
- Externalities (pollution,…)
- Incomplete markets (student loans,…)
- Information failure (imperfect information): adverse selection (hidden
type) and moral hazard (hidden action)
- Unemployment and in ation
2. Equity and redistribution: inequality of outcomes vs inequality of opportunity.

EQUITY-EFFICIENCY TRADE-OFF POLICIES:

- increase economic ef ciency often lead to an increase in inequality (free trade…)
- redistribute income lead to more equality, often at the cost of economic ef ciency (higher taxes…)
- policies that can increase both ef ciency and equity: Breaking up monopolies, Universal public education and Tax credits
for low-income households

THE SIZE OF GOVERNMENT:

—> ratio that measures the size of government relative to the economy

GOVERNMENT LEVELS:
1. Local level: garbage collection, sanitation, local traf c rules (parking, restricted areas), taxes (real estate)
2. Regional level (Autonomous Communities): health, education, taxes (inheritance, donations, wealth, part of income
tax), justice (part), infrastructure (part).
3. National level: defense, justice (partly), infrastructure, taxes (part of income tax, corporate tax, value-added tax, special
taxes on gas & alcohol).
4. Supranational level (EU): monetary policy (ECB), trade and competition policy

HOW DOES GOVERNMENT PAY EXPENDITURES:

1. Modern taxes:
- Taxes on income: Personal income tax and Corporate income tax
- Taxes on consumption: Value-added tax (VAT), Sales taxes and Excise taxes on speci c products (cigarettes, alcohol,
gasoline)
- Social security contributions: Dedicated exclusively to nance pensions

2. Traditional taxes:
- Taxes on imports: Tariffs and Other import fees
- Taxes on wealth: Inheritance tax and Wealth tax
- Taxes on property: Tax on residential property

Página 1

fi
fl

fi

fi

fi

fi

fi

 AdSJ - 3ºH
BUDGET DEFICITS AND PUBLIC DEBT:
- budget de cit: T < G
- Budget surplus: T > G
- To nance de cits, governments need to issue public debt (D) and pay interest (r ) on that debt

—> assesses how indent is a country’s government, but compares a stock (debt) against a
ow (GDP)

WHAT IS THE COST OF PUBLIC DEBT?:

- annual cost of interest payments for the government is = rD

Página 2
fl
fi

fi
fi

 AdSJ - 3ºH
TOPIC 2: INEQUALITY AND REDISTRIBUTION:

INCOME AND WEALTH INEQUALITY:

- Causes of income inequality increase since 1980: gobalization, technological change and policies (lower taxes on top earners and
businesses)

- Wealth is now even more concentrated than income.

MEASURE INEQUALITY:

1. Gini coef cient (G): Area under the Lorenz curve (cumulative share of total income)

- Perfect equality → G = 0; the Lorenz curve is a straight line at 45 degrees

- Perfect inequality → G = 1; with some inequality the Lorenz curve lies below the 45-degree line

- It is sensitive to changes in the middle of the distribution and requires very detailed data.

- the Gini coef cient is calculated on net income, i.e. after taxes and transfers

2. Top income shares: share of all income earned by the top 1% (or any X%) of the population. It’s easy to interpret and can only be
calculated well with data from tax returns (surveys are imprecise)

CAUSES OF INCOME INEQUALITY:

1. Globalization: Free trade allows consumers in high-income countries to buy goods produced in low-income countries, where wages
are lower

- Who bene ts? Consumers in high-income countries and manufacturing workers in low-income countries

- Who loses? Manufacturing workers in high-income countries, uneducated workers in low-income countries

- Results: Higher inequality within countries and lower inequality between countries

2. Technological progress & Automation:

- technological innovations (computers, internet) make some workers more productive - Of ce workers, executives, nancial sector

- Other innovations (eg, robots, automation) replace workers - Manufacturing workers, translators

- Some low-skill jobs are harder to replace by technology - Caregiving for the old, personal services

- Results: more demand for high-skilled workers, more demand for lowskilled workers and “Missing middle”

3. Tax Policies: In the last 40 years, taxes on high incomes, capital income and corporate pro ts have consistently declined. These
changes have generally bene ted top income earners: Owners of rms and High share of capital income

WEALTH INEQUALITY: Rising income inequality is a direct cause of increasing wealth inequality, because of intergenerational
transmission: Economic wealth is passed from parents to children and Genes are also inherited.
Página 3

fi

fi
fi

fi

fi

fi

fi

fi

 AdSJ - 3ºH
CONSECUENCES OF INEQUALITY:

- Political polarization

- Inequality of opportunity wasted talent?

- Negative effect on economic growth (according to some studies)

- Countries with a higher Gini coef cient experience lower economic growth in the next 10 years

EQUITY - EFFICIENCY TRADE OFF:

How can economic policies tackle inequality?

- Progressive taxes —> ↑ equality but ↓ ef ciency

- Universal public services (education, health) —>↑ equality … but taxes needed to nance them ↓ ef ciency

- Cash transfers to poorer households —> ↑ equality … but taxes needed to nance them ↓ ef ciency

ECONOMIC DEFINITION OF EFFICIENCY:

- Pareto ef ciency: an allocation of resources is “Pareto ef cient” if no one can be made better off without making someone else worse

- Why is this de nition useful? Very general: doesn’t need to speci cy how we get to each allocation

- What are its limitations? Does not take into account the distribution of resources. If one person has all income and everyone else has
nothing, it can be a Pareto-ef cient allocation; and all individuals having the same income can also be Pareto ef cient.

DEBATES ABOUT ECONOMIC POLICY: Not everyone puts the same weight on ef ciency and equity. This leads to many debates about
what is the best policy → normative economics: ex: how the economy should work In this course, we will focus mostly on
understanding (and measuring) the effects of policies on ef ciency and equity → positive economics: ex: how economy actually works.

1. NORMATIVE ECONOMICS asks: should the tax be adopted? Requires making tradeoffs: bene ts of the tax revenue vs costs of reduced
consumption, bene ts of lives saved on the road vs increased inequality and evaluating alternative ways of raising the same amount of tax
revenue

- Disagreements: The validity of speci c models: ex: model with perfect competition and perfect information is a good approximation
for the market for apples; but not so good for the market for healthcare services. The magnitude of responses to policies: Studies
conducted in different countries/periods may yield different results. Values and priorities: concerns regarding inequality, ef ciency, etc.

EXCEPTIONS TO EQUITY EFFICIENCY TRADE-OFF: When there are market failures, some policies may increase ef ciency and equity at
the same time:

Pollution → Negative externalities → Carbon tax

Education → Positive externalities → Universal public education

Extreme poverty → Negative externalities → Welfare programs

Innovation → Public good → Subsidies to R&D investment

Página 4

fi
fi

fi

fi
fi

fi
fi

fi
fi

fi

fi
fi
fi
fi

fi

fi

fi
fi

fi

 AdSJ - 3ºH
TOPIC 3: SOCIAL INSURANCE:

Individuals are exposed to many risks: Health problems, Becoming unemployed, Losing the ability to work, Due to old age or another
disability (e.g., accident)

Why don’t markets provide adequate insurance for all these risks? Asymmetric information (Adverse selection, Moral hazard ,
Related problem: high transaction costs) and Present-bias: some people don’t demand insurance or don’t save.

ADVERSE SELECTION: Consider the health insurance market: People have different risk levels, Insurers do not observe each person’s risk.
Equilibrium:

1. Insurer sets premium calculated for the average risk person.

2. Sick people buy insurance

3. Healthy people don’t buy insurance

4. Insurer increases premium to match average of remaining pool... and back to point 1

The market unravels due to adverse selection. In equilibrium, premiums are too high and many people are left uninsured

MORAL HAZARD: Consider the car insurance market. A company offers car insurance, including repairs in case of accident. Anthony (A)
purchases the insurance; and Ben (B) does not purchase the insurance. Who do you think will drive more carefully, A or B? What is the
underlying problem? The company cannot observe whether clients drive carefully or not à Asymmetric information. Equilibrium: insurers
will charge a premium that is higher than the actuarially fair premium à Some people won’t buy

Página 5

 AdSJ - 3ºH
TRANSACTION COSTS:

- Private insurers would like to charge a different premium to each person, depending on their risk. If feasible, this is a Pareto-ef cient
outcome

- In practice, asymmetric information forces insurers to spend resources screening applicants to learn about their risk level —> Leads to
high transaction costs for insurers

- When everyone is required to buy insurance (eg, compulsory car insurance), these costs fall

PRESENT BIAS: Some risks are predictable. Most people will reach old age and become unable to work for several years ( life
expectancy). Everyone gets sick at some point in life. The probability of sickness increases with age. However, even if available, many
people don’t buy insurance against these risks: Prefer to consume today rather than pay for reduced uncertainty about future consumption
—> Present bias. Example: not saving for old age, not buying health insurance

SOCIAL INSURANCE: RATIONALE FOR PUBLIC INTERVENTION: In the presence of asymmetric information and/or present bias,
private markets don’t lead to a socially ef cient outcome:

- Some people are left uninsured: Insurance premiums are too high (supply) and Individuals are present-biased (demand)

- These problems are the rationale for government provision of insurance against certain risks: Poverty in old age —> Public pension
systems, Sickness —> Public health insurance; and Unemployment —> Unemployment insurance

PUBLIC PENSIONS SYSTEMS (SOCIAL SECURITY): provide a basic living standard for old people, also survivors and the disabled.
Alternative ways of nancing public pension programs:

- Pay as you go (PAYG): based on intergenerational solidarity. Contributions by current workers nance current pensioners

- Fully-funded (FF): relies on nancial markets. Each person contributes to their own fund, which is invested in capital markets. At the
time of retirement, funds converted into an annuity (Annuity: nancial product that pays you a guaranteed income for a xed period or
for the rest of your life).

Página 6

fi

fi

fi

fi

fi

fi

fi
 AdSJ - 3ºH

PUBLIC PENSION SYSTEM: provide a basic living standard for old people, also survivors and the disabled. Alternative ways of calculating
pension bene ts:

- De ned bene t (DB): bene ts are a speci ed monthly amount, often calculated using a formula based on lifetime contributions

- De ned contribution (DC): does not promise an amount of bene ts, but xes the contribution rate (e.g., a xed % of the salary). The
pension bene t will depend on investment returns

- Notional de ned contribution (NDC): mixed system. Similar to PAYG because current workers nance current pensions. Similar to
DC because bene ts depend on a “notional” rate of return, based on individual’s contributions, life expectancy and exp. interest rate

Objectives:

1. Providing income insurance for old age: Address market failures due to asymmetric information and Address individuals’
present bias à paternalism?

2. Redistributing income: Address inequality within generations (Minimum and maximum pension amounts and Noncontributory
pensions) and Potential redistribution between generations.

Public pension systems have been broadly successful:

1. Poverty rates among the elderly are lower than ever before. Despite the fact that they represent a larger share of the
population

2. Good for recipients but also for their children, who no longer have to support elderly parents economically.

There are four main concerns about public pension systems:

1. Fiscal sustainability

2. Crowding-out of private savings

3. Disincentives to work

4. Low rate of return compared to stock market

Página 7

fi
fi

fi
fi
fi
fi
fi

fi

fi

fi

fi
fi
fi

 AdSJ - 3ºH
SUSTAINABILITY OF PUBLIC PENSION SYSTEMS: Factors putting public pension systems (esp. PAYG) under stress:

1. Population aging: Combination of longer life expectancy and lower birth rates. As the dependency ratio (population>65 /
population 16-64) increases, the burden of current pensions becomes large relative current contributions

2. Low productivity growth: Slow wage growth —> Slow growth in Social Security contributions

3. Low effective retirement age: Early retirement options and Actual retirement age < Statutory retirement age

How to make public pension systems more sustainable?

Revenue side:

- Increase the rate of Social Security contributions: Increases effective taxes on labor, which are already quite high; burden of the
adjustment is fully on the younger generation

- Increase productivity to raise wages: Easier said than done. Many govt policies aim to increase productivity

- Extend the number of years people work, e.g. raising the legal retirement age. Done by many countries, although it is unpopular and
there is unequal impact on manual vs. of ce workers

Expenditure side:

- Reduce the replacement rate of bene ts. Highly unpopular. If applied to current pensioners, it leaves them with little room for maneuver
as they planned for their retirement expecting higher bene ts

Página 8

fi
fi

fi

 AdSJ - 3ºH
SPANISH PUBLIC PENSION SYSTEM: characterized by high replacement rate (80% of the past salary), high contribution rates (28% of
current salaries) and a high dependency ratio (less than 3 workers per 1 pensioner)

- Decline on births

- Lower fertility rate

- Increase in life expectancy

- Increase in old age dependency ratio

- Decline in working years and increase in retirement years

- The statutory (legal) retirement age is not necessarily the same as the effective retirement age. The differences depend on the incentives
to continue working offered in each country

- The poverty rate of those over 65 is the lowest of all age groups in Spain. The age group with the highest chance of being poor are the
young (between 16 and 29)

- The Spanish Social Security system had annual surpluses until 2009. The combination of population aging and economic recession
have sent it into de cits of up to 2% of GDP. Projections estimate that the de cit will increase if there are no reforms

- Decrease in af liates to SS: The number of employed people in Spain decreased during the 2009- 2013 recession. The recovery of
2014-2019 was almost undone by the pandemic shock in 2020. More recently, employment has recovered

- The total number of pensioners has doubled from 5 million in 1983 to 10 million in 2021. An increasing share of pensions are
retirement pensions (the number of survivors’ and disability pensions is more stable).

- The average monthly pension amount is increasing, as people who worked during the 1980s, 1990s and 2000s retire. The share of
pensions higher than €2,000 per month (the median wage in Spain today) is increasing rapidly.

- The gross replacement rate (pensions as a % of past wages) is high in Spain compared to other countries with pay-as-you-go systems
(left group). Mixed systems (center) have lower rates. Fully-funded systems (right) have high replacement rates, except in Chile.

- The share of population covered in private pension plans is low in Spain compared to most other European and OECD countries.

- Spanish citizens have very little savings in private pension plans or life insurance policies as a share of GDP. Instead, Spanish
households tend to save in real estate assets

- The saving rate of Spanish households is 6.3%, half of the EU average and barely 1/3 of the average in Germany or Sweden. A low
saving rate tends to translate into a low investment rate, which limits economic growth.

- Spanish households hold wealth mainly in real estate assets (gray) as opposed to nancial assets (green). This makes Spanish
households vulnerable to housing market collapses (like the one in 2008) and also because real estate investment has a lower average
return than nancial investments.

Why does the government intervene in health care:

1. Market failures:

- Adverse selection

- Moral hazard

- High transaction costs

Página 9
fi

fi

fi

fi

fi

 AdSJ - 3ºH
- Limited competition

2. Distributional concerns:

- Health care is perceived as a right, because consumption is often not voluntary (we don’t choose when we get sick)

- Health services can be very expensive —> A large share of the population may not be able to afford the care they need.

- People face different risks —> People with pre-existing conditions face higher prices in private market

How do private health insurance markets work? There are two main forms of private health insurance provision:

1. Fee-for-service (retrospective):

- Doctors are reimbursed on the basis of service provided

- Often, insurer reimburses an amount in excess of a deductible

- The fraction paid by patient on top of the deductible is the co-payment

- Doctors have incentives to overprovide treatments

2. Diagnosis-based xed payment (prospective)

- A third-party (insurance company, the govt) mediates between doctor and patient specifying the treatments to be done and negotiating
the fees

- Payment based on the number of patients enrolled, regardless of health status

- This system does a better job at keeping costs under contro

How can governments intervene in the health care sector?

- Direct provision of health care services

- Subsidizing individual purchase of care and health insurance

- Financing health research

- Public health measures to prevent disease: vaccination, restrictions

- Regulating drugs and medical services

How do governments actually intervene in the health care sector? In advanced countries, provides universal health care:

- Govt-funded (single-payer) health care: Spain, UK, Canada, Denmark, Sweden, etc.

- Universal public insurance: France, Germany, China, India, Japan

- Universal private-public insurance: Mexico, Argentina, Chile, Turkey

Página 10

fi

 AdSJ - 3ºH
- Main exception: the United States govt does not offer universal health insurance. Most other countries in this category are in Sub-
saharan Africa

Is universal health care desirable? Health care is expensive, so many low-income families cannot afford the care they need. People
face different health risks (pre-existing conditions). Those with high risk face very high insurance costs in the private market. Should the
govt insure people for health risks?

- Yes if health risks outside of people’s control (age, genetics)

- Not necessarily if risks are due to choices (diet, exercise)

UNREGULATED LABOR MARKETS: PROS AND CONS:

Advantages of unregulated labor markets (when competitive):

- Ef ciency: wage paid to workers is equal to the marginal product of their labor

- Low unemployment: in general, there should only be ”frictional unemployment” (unemployed people are just transitioning
between jobs)

Disadvantages of unregulated labor markets:

- Distributional concerns: equilibrium wage may be too low to cover basic living standards

- High worker turnover: leads to low on-the-job training, lowering productivity ( rms don’t internalize the full value of that training to
society)

UNEMPLOYMENT RATES IN ADVANCED COUNTRIES:

- In countries with exible labor markets (eg, US), the unemployment rate uctuates throughout the business cycle: the labor market
does not “clear” in recessions

- Spain is an outlier due to its extremely high unemployment rate: more likely due to govt failure (bad regulation) than market failure

- Temporary employment: jobs in which the contract has a xed termination date. When employment protection is high, govts use
temp contracts to make the labor market more exible. However, temp contracts can lead to faster job destruction in recessions

UNEMPLOYMENT INSURANCE: RATIONALE:

- In unregulated labor markets, workers that lose their job also lose their income

- If labor market is ef cient, worker immediately nds another job and continues earning money (frictional unemployment)

- In recessions, workers can spend a long time unemployed because low aggregate demand prevents rms from hiring workers (long-
term unemployment)

- In order to insure workers against this risk, many govts offer unemployment insurance

Página 11
fi

fl
fi

fl
fi

fi

fl

fi

fi

 AdSJ - 3ºH
UNEMPLOYMENT INSURANCE: DESIGN: A system of unemployment insurance (UI) has the following key parameters:

- Eligibility: who is eligible to receive the bene t? In Spain, need to work for at least 26 of the last 36 weeks before becoming
unemployed to get the basic level of bene ts

- Level of bene ts: what percentage of the past wage is covered by the UI system? In Spain, UI covers 75% of the previous wage
during the rst 2 months and 70% from month 3 onwards. [Why the drop?]

- Duration: how many months do UI bene ts last? In Spain, the basic coverage is 3 months. Depending on the number of years worked,
the bene t can last for up to 38 months (more than 3 years)

UNEMPLOYMENT INSURANCE: COST:

- During the 2012 recession, the Spanish govt spent more than 3% of GDP on unemployment bene ts

- Spending on UI has been much more stable for other EU countries such as France and Germany, which didn’t experience big swings in
unemployment

- Spending on UI is lower in the US, but more volatile in recessions

FIRING COSTS (SEVERANCE PAYMENTS):

- In unregulated labor markets, rms re workers frequently in response to temporary shocks. Since workers acquire skills over time by
learning on the job, switching jobs too often leads to lower skill accumulation

- Firms do not internalize this cost because the skills acquired by a worker in one rm can be used by the worker in another rm. On-the-
job learning generates positive externalities

- To address this issue many countries require rms to compensate dismissed workers with a severance payment that increases with the
worker’s tenure. Downside of high severance payments: reduces incentives to hire workers

FIRING COSTS (SEVERANCE PAYMENTS + NOTICE):

- The cost of ring a worker is composed of two elements: the notice period and the severance payment

- Notice period: number of months in advance that the rm needs to notify the worker before ring them

- Severance payment: amount paid to the worker as compensation for dismissal

UNEMPLOYMENT IN SPAIN VS FRANCE: Spain and France have very similar labor market regulations, especially employment
protection regulation (we mostly copied them!). However, French unemployment increased much less in the Great Recession, and also in
the Covid Recession. Bentolila et al (2011) argue that this is due to the larger gap in severance payments for permanent vs temp contracts.
This gap pushes Spanish rms to use temp contracts too much, leading to large variation in the unemployment rate over time . There
might be other factors explaining Spain’s higher unemployment rate in the long term, but this seems to be one of the key factors. The
recent labor market reform in Spain has made it more dif cult to use temp contracts.

SHARE OF NEW CONTRACTS THAT ARE TEMPORARY: The proportion of new contracts that are temporary fell drastically in March 2022
with the application of the last labor reform. Dropped from 85-90% of all new contracts to 50- 60%

Página 12
fi
fi
fi
fi

fi
fi
fi

fi
fi

fi

fi

fi
fi

fi

fi
fi

fi
 AdSJ - 3ºH
TOPIC 4: REDISTRIBUTIVE POLICIES:

REDISTRIBUTION: policies that aim to compensate the unequal outcome resulting from market interactions. - Direct cost for the
government budget

PREDISTRIBUTION: policies that aim to reduce income inequality during market interactions. Term coined recently, although policies
already existed - No (direct) cost on the government budget

CASH TRANSFER POLICIES:

Traditionally, redistributive policies consist mostly of in-kind provision of public services, such as education and health:

- Advantages: cover basic needs + provide a level playing eld

- Disadvantages: cannot cover all needs; paternalism critique

Recently, emphasis has been put on direct cash transfers, under different designs:

A. Universal basic income (UBI) :

- xed, monthly cash grant given directly to all adult citizens (universal)

- Designed to cover basic living expenses: housing, food, clothing (basic)

- Does not depend current income, or labor force status (unconditional)

- Objectives: Reduce poverty and Insure workers against uncertainty created by new labor market trends

- Advantages:

a. Low admin costs (by transferring money directly to people, it does not require setting up a complex administration; similar to
public pension systems (PAYG) )

b. Freedom (recipients can spend the money whichever way they prefer. No paternalism critique)

c. No disincentive to work, since it is universal and unconditional, it does not create perverse incentives against work. People are free
to work while they receive UBI.

- Problems:

a. Poorly targeted: why transfer the same income to the rich and the poor? Why not focus it only on the poor?

b. Expensive: Consider a UBI of €500 per month (€6,000 per year) to each adult in Spain (35 million approx). How much would it cost?
What share of Spain’s GDP is that?. Even if it replaces some existing policies (other transfers, social policies, part of pension
payments...), this would increase the govt de cit

c. Disincentive to work: even if unconditional, the extra income lowers incentives to work through an income effect

d. Inappropriate use: there is a concern that the money might be spent on alcohol or drugs, instead of basic needs

- Evidence: Finland experiment: 2,000 randomly-selected individuals that received €560 per month. After 2 years, those receiving
the UBI were a bit more likely to be employed than those who were in similar conditions but didn’t receive the UBI. Recipients also
reported higher overall wellbeing than non-recipients. Reduced alcohol consumption and drug use. In sum: positive results, but many
more studies needed before we can generalize the ndings

Página 13
fi

fi

fi
fi

 AdSJ - 3ºH

B. Minimum income schemes (MIS): less ambitious alternative to UBI.

- Means-tested: targeted to households below an income threshold

- Household level: bene t calculated at household level, taking into

account the characteristics (number of adults and children).

- Most European countries currently have some form of MIS. Spanish

autonomous communities each have a regional MIS, which is now
complemented by the Ingreso Mínimo Vital (IMV) passed in 2020

C. Earned-income tax credits (EITC): alternative model of cash transfer.

- Only for working people: Assumes the unemployed are covered by unemployment insurance. Provides incentives to enter the labor
force

- “Pyramid” pro le: Tax credit increases at low income levels, Reaches a pleateau and Then reduced (taxed away) quickly

- Household level: Tax credit given to households; large if more children

PYRAMID PROFILE

Página 14

fi

fi

 AdSJ - 3ºH
NEW FEATURES OF LABOR MARKETS:

- The relationship between workers and rms has evolved over time. Workers now switch employers more often

- Gig Economy: increasing number of workers provide labor for online platforms where supply is very exible: uber, glove,…

- Technological change: many recent tech innovations (robots, arti cial intelligence, driverless cars) replace workers that perform
mechanical tasks. At least in the short term.

- Traditional employment protection policies are not well designed to insure workers against negative shocks in this contex

MINIMUM WAGE: has to be paid to all workers.

- This wage can be speci ed in hourly, daily, weekly, monthly or annual terms (or all at the same time)

- Goal: reduce income inequality by raising the income of poorer workers

- Cost: little cost for the govt budget, as very few govt employees have wages as low as the minimum wage.

- There is an intense debate about the effects of the introduction (or increase) of the minimum wage: How does it affect employment?
How does it affect ef ciency and productivity? Does it reduce inequality?

NEOCLASICAL MODEL:

Página 15

fi
fi

fi

fi

fl

 AdSJ - 3ºH
MONOPSONY MODEL:

EFFECTS OF MINIMUM WAGE INCREASE: Many studies that estimate the effects of min wage increases on total employment The
results are varied: some studies nd negative effects, some nd no effect and a few studies nd a positive effect on employment. David
Card (Canada, 1956) wrote a famous study in 1994 with Alan Krueger, showing that a minimum wage increase in New Jersey did not have
a negative effect on employment (see next slide).

Página 16

fi

fi
fi
 AdSJ - 3ºH

Página 17