Sunday, February 21, 2010

Playing around with wage settings

What is crucial in government benefits is understanding them in term of wage subsidies for private firms. If we consider a medium sized firm of 3125 assembly workers, who receive a pay equal to 1/170 of the CEO pay, say the CEO of GM getting 9 million while worker at final assembly gets 52,000; then the CEO ratio is made up of about 173 of the assembly worker wage. If the CEO personally pays less than 5% of government benefits to his worker, then his firm and his wages gain in real terms for each additional dollar of government benefits. If the CEO pays 6% or more of the total benefits, then each additional dollar of government benefits does not pay.

This is a cost shifting incentive, when the firms are efficient, more efficient than the progressive tax rates, then the firm seeks to move as much wage overhead to government as possible. Hence, for a given set of progressive tax rates, any firm that can efficiently stack wages and organization steeper than the progressive rates, will always see a gain from more entitlements that offset wages normally provided by the firm.

The solution is to make sure the progressive rate is precise up to the standard error of the firm such tha tmanagement sees no gain from the government expansion.

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