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A quantitative evaluation of payroll tax subsidies for low-wage workers: An equilibrium search approach

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  • Chéron, Arnaud
  • Hairault, Jean-Olivier
  • Langot, François

Abstract

Phelps [Phelps, E. (1994): "Low-wage employment subsidies versus the welfare state", American Economic Review 84, 54-58.] presented the case for a low-wage subsidy policy. Since the mid-1990s, France has experimented with this strategy. This paper evaluates the effect of this policy on employment and also on output and welfare. We construct an equilibrium search model incorporating wage posting and specific human capital investment, where unemployment and the distribution of both wages and productivity are endogenous. We estimate this model using French data. Numerical simulations show that the prevailing minimum wage allows a high production level to be reached by increasing training investment, even though the optimal minimum wage is lower. We show that payroll tax subsidies enhance welfare more than a reduction in the minimum wage when they are spread over a large range of wages in order to avoid specialization in low productivity jobs.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 92 (2008)
Issue (Month): 3-4 (April)
Pages: 817-843

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Handle: RePEc:eee:pubeco:v:92:y:2008:i:3-4:p:817-843

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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Citations

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Cited by:
  1. Fabien Tripier, 2010. "The Efficiency of Training and Hiring with Intra firm Bargaining," Working Papers hal-00449625, HAL.
  2. Chéron, Arnaud & Langot, François, 2010. "On-the-job search equilibrium with endogenous unemployment benefits," Labour Economics, Elsevier, vol. 17(2), pages 383-391, April.
  3. Arnaud Cheron & Benedicte Rouland, 2010. "Endogenous Job Destructions and the Distribution of Wages," Papers 2010-20, TEPP Working Paper.
  4. Bucher, Anne, 2010. "Impacts of hiring subsidies targeted at the long-term unemployed on the low-skilled labor market: The French experience," Economic Modelling, Elsevier, vol. 27(2), pages 553-565, March.

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