Making Work Pay: A Preliminary Analysis of a Wage Subsidy to Low-Paid Workers in Italy

Abstract This paper analyzes the potential introduction of a permanent public subsidy to supplement the wages of low-paid workers in Italy, taking inspiration from Edmund Phelps’ ideas on a welfare system designed to reward work not only as a source of income, but as a means of personal development, social inclusion, and economic contribution. Specifically, we consider how a subsidy scheme for low-wage earners can help address structural labor market challenges such as low participation rates, labor market segmentation, and in-work poverty. Using a dynamic general equilibrium two-sector model, we analyze how such a subsidy could affect wages, employment, and long-term welfare of both low-paid unskilled workers and skilled workers. Furthermore, through a scenario analysis based on Italian Labor Force Survey data, we quantitatively assess the policy’s likely scale, distributional effects, and costs. The paper concludes by discussing both opportunities and challenges for implementing wage subsidies in Italy’s segmented labor market.