This seems to be a good idea. But the only problem with it is that the labor market is not as liquid as a financial market. It is in principle quite possible for a person in a free market to be commanding 1.5 * minimum_wage in a part time job or for part of the year, but unable to find work for the rest of the year or rest of the free time, which would push his annual salary below minimum wage. Theoretically there should be absolutely zero unemployment with no minimum wage laws. However in practice it would still be a couple of percent due to liquidity holes in the market, with people in between jobs, in the process of talking with multiple employers etc. In my method, there is still incentive for people earning above min wage to work as hard as possible, since the state subsidy is only (x-y)/2 and not (x-y). I agree with your point though, that the incentives would be stronger in the event of replacing earnings with "hourly wages", if only you could handle the issue of genuine unemployment due to liquidity holes that prevent the person from making min wage averaged across the year.